TRADING BINARY OPTIONS SPREADS AMIDST LARGE MOVES AND REVERSALS

TRADING BINARY OPTIONS SPREADS AMIDST LARGE MOVES AND REVERSALS
TRADING BINARY OPTIONS SPREADS AMIDST LARGE MOVES AND REVERSALS
TRADING BINARY OPTIONS SPREADS AMIDST LARGE MOVES AND REVERSALS Getty Images

In current market conditions it is easy for a trader to lose sleep over their positions. With U.S. equity markets tracking overnight moves in global markets there have been some massive gaps on the open and a huge risk of an outsized loss has been present in nearly every trading session this year. While movement in markets generally creates opportunity they can also create large sources of risk for traders who are trading actively intraday.  This has been a major concern for any trader actively involved in trading stocks or equity index futures in what has been a very volatile start to the year.

For example in Wednesday’s trading session the CME E-mini S&P 500 futures traded in an intraday range of 1852.50 at the highs to 1804.25 at the lows. This means that a trader who bought at the highs and held to the lows would have seen a swing of $2,412.50 per 1 lot. This is too much potential risk for most traders. While a stop loss can remove much of this risk it cannot provide the trader the ability to stay in the position for a possible rebound. If a futures trader is stopped out of a trade they have realized the loss and will need to re-enter if they hope to reclaim their losses. When markets trade I wide ranges and have the tendency to reverse this problem can cause traders a lot of frustration. Luckily binary options spreads offer a solution to this problem.

Not only does a binary option trading allow a trader to make simple yes or no predictions it also offers traders the opportunity to trade spreads.  To see how a binary spread provides a better reward to risk profile than outright futures lets break down two trade examples.

Trade #1:  A trader buys 1 CME E-mini S&P 500 Future Contract for 1865.00 with a stop loss order at 1850.00
Risk: $750 per 1 lot
Reward: Unlimited
Breakeven: 1865

In this example a trader is exposing themselves to $50 in risk per point in the CME E-mini S&P 500. The stop loss order limits the downside risk but if the futures trade below that level the trader will be stopped out of their position and will not participate in any more moves in the underlying.

Trade #2: A trader buys the US 500 Daily 1850-1890 Binary Spread at 1868
Risk: $180 per 1 lot
Reward: $220 per 1 lot
Breakeven: 1868

While the overall potential reward in this trade is lower the built in “floor” and “ceiling” in the spread cap a trader’s level of risk and reward in the position. If the futures close below 1850 on expiration the loss cannot be more than $180 per 1 lot. Likewise if the futures close above 1890 on expiration a trader cannot make more than $220 per 1 lot. This allows for a trader to have a much more well defined reward to risk ration but the main advantage of this spread over a trade in the outright is staying power.

In the futures trade a trader no longer participates if they are stopped out. In the spread trade the trader can stay in the position even if the futures move below 1850 as they cannot lose more than the trades floor allows. This means that if the futures sell off below 1850 and then rebound the spread trader can participate in the rebound without having to exit and re-enter the trade. When the markets are trading in as large of a range as we have been seeing and reversals can happen very quickly this is a huge advantage. If you are finding that your trades are being stopped out only to see the market reverse in your favor you may want to consider binary options spreads.

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