On a range bound day, also known as a flat market or a non-trending day, the butterfly is an excellent strategy to use. This is a good strategy to use if you trade during the evening or nighttime hours when the markets tend to move a little slower.
To set up a binary butterfly, buy a lower strike binary In-The-Money binary and sell a higher strike binary In-The-Money binary. The plan is to have the underlying market settle right between the two strike levels, of the 2 positions that you bought and sold at expiration.
When you look at your charts, notice the expected volume. It is important to have lower than expected volume.
With a butterfly, the market can move three ways where you will still profit. For the binary that you bought, the market can go up, stay in the middle or come down, as long as it doesn’t go below your strike. For the binary that you sold binary, the underlying marekt can go down, stay in the middle or go up, as long as it doesn’t go above your strike.
Ideally, you want the price to stay in the middle of where you bought at the bottom and sold at the top so that you receive max profit on both contracts. The following image may clarify this strategy for you.
Notice the downtrend on the left side of the image and how the right side is non-trending or range bound. If you were to buy a contract with a strike near the level of the lower blue arrow and sell a contract with a strike near the level of the upper blue arrow, the butterfly would be set up. As long as the underlying market stays within that range, you would make max profit.
Your looking to have your initial cost of each position at around $75 to $80 per contract which means your selling the binary price at 20 to 25. This would give you about $40 – $50 profit potential if the trade works out according to your plan.
Nadex offers 5-minute, 20-minute, hourly, daily and weekly binary contracts. When initiating binary trades that are in the money, you are paying for this immediate advantage. The differential that the underlying price is over the strike for the buyer or the underlying price is below the strike for the seller which is an immediate trade advantage.
This is why the binary is more expensive but if your comparing longer duration’s you’ll notice this differential increases when comparing equivalent binary pricing.This is an important relationship to understand especially if your using this strategy on shorter duration’s.
Note Exchange fees not included