Expiration day is a great day to trade binary options. On the days the options on futures expire a trader can use these options to develop targets for binary options trades. This creates opportunities to develop targets for securities that don’t normally have weekly options. These targets are generally more accurate than any targets projected using technical analysis because they are calculated using real time market prices and expectations. Let’s go over an example of how this trade setup would work in the CME E-Mini Nasdaq 100 futures and how a trader can use the US Tech 100 binary options to take a speculative day trade.
First a trader needs to develop upside and downside targets using the options on futures market. These targets will show us how much movement market makers are expecting by expiration. On expiration day the targets represent the market makers expected movement by the close and can be used to set up day trades. To calculate these targets we will use the May expiry options on CME E-Mini Nasdaq 100 futures. These options will give us the expected movement for the days close. We will use the price of the at the money straddle to calculate market makers expectations.
The at the money straddle is simply the price of the at the money puts plus the price of the at the money calls. With the CME E-Mini Nasdaq 100 trading at 4370.00 we will sue the price of the May 4370 straddle to back out expected movement.
The CME E-Mini Nasdaq 100 May 4370 straddle is trading at 23 points
Using this measure we will calculate an upside and downside target
Upside Target = 4370 + 23 = 4393
Downside Target = 4370 – 23 = 4347
Using these levels we can look to set up a bullish or bearish binary options trade depending on our expectations for the underlying markets movement into the close.
Possible Bullish Trade: Buying the US Tech 100 > 4390 Weekly Binary Option for $20
Risk: $20 per 1 lot
Reward: $80 per 1 lot
This trade gives a trader a 4-1 reward to risk setup and will settle at full value if the market closes at or above the calculated measured move target.
Possible Bearish Trade: Selling the US Tech 100 > 4354 Weekly Binary Option for $60
Risk: $40 per 1 lot
Reward: $60 per 1 lot
This setup does not offer a trader the same reward to risk ratio as the bullish play but due to the strike structure it is the only option with a strike price above the downside target. A trader is still getting 1.5-1 on their money in this trade showing us that these simple binary options trade setups are easy to run and provide a great reward to risk ratio.