In expiration week a trader can set up a simple overnight trade in indices using binary options. Expiration week is a particularly good time to do this as every futures contract will technically have weekly options. We can use the options on futures markets to develop targets for a binary options trade setup. Normally this is only a setup that can be run on a weekly basis in the CME E-mini S&P 500 futures as they have listed weekly options. Since standard May expiry is tomorrow traders can run this strategy in any optionable futures contract with options expiring tomorrow. We will use the options on futures to set up an overnight trade in CME E-mini Dow futures. Let’s look at how we set up this trade.
First we need to calculate the markets expected movement by tomorrow’s close. To do this we will use the price of the at the money straddle to back out the market maker’s expectations for movement. With the futures currently trading at 17350 we will use the price of the May 17350 straddle.
CME E-Mini Dow May 17350 Straddle is trading at 180 points
We will use this measure to calculate upside and downside targets. These are the implied closes for tomorrow.
Upside Target = 17350 + 180 = 17530
Downside Target = 17350 – 180 = 17170
Using these calculated targets a trader can set up a bullish or bearish binary options trade. These levels tend to be more accurate than technical projection methods because they are derived from real time prices and market expectations. Let’s look at two trade setups.
Possible Bullish Trade: Buying the Wall St 30 > 17525 Weekly Binary Option at 20
Risk: $20 per 1 lot
Reward: $80 per 1 lot
This gives a trader a 4-1 reward to risk ratio and also sets up to go to max value if the market trades and closes at its upside measured move target.
Possible Bearish Trade: Selling the Wall St 30 > 17225 Weekly Binary Option at 75
Risk: $25 per 1 lot (100 -75 trade price)
Reward: $75 per 1 lot
This trade has a 3-1 reward to risk ratio but has a strike price well above the downside target. These are two very simple and easy to run strategies that can be done in any futures contract with an options expiry at the end of the week. A trader could also run these calculations the morning of expiry and use them to day trade binary options and spreads. This is also a much less risky way to speculate on the Dow and other indices that using options on futures or outright futures.