Trading Double Tops in Crude Oil

Trading Double Tops in Crude Oil

Oil has been trading with tremendous volatility recently as the battle over supply and demand tries to find market equilibrium. Whether you’re bullish or bearish Crude Oil, there are a variety of ways to trade this commodity when looking at the binary option market on the Nadex Exchange.

Trading Double Tops in Crude Oil
Trading Double Tops in Crude Oil Getty Images

Whether you’re looking for a high probability trade, or you’re looking for a low-risk/high-reward trade set up, binary options provide a multitude of possibilities when scanning markets.

Below, we see a chart of the July Crude Oil Futures contract as of about 7:30 am ET this morning. On the right hand axis are the daily binary options for Oil on the Nadex exchange that expire at 2:30 pm ET today, leaving about 7 hours until expiration.

Trading Double Tops in Crude Oil

You can see the double tops marked on the chart, along with the Fibonacci retracement levels marked in blue from Crude Oil’s most recent rise yesterday. If you were bearish Crude Oil from the double top we’ve recently made, then there are at least a couple simple binary option trades you could make to profit from an expected market move.

If you felt yesterday’s high was an area that Oil would not trade above today, then you could choose to sell a binary option above the current market. If you sold the > $49.50 Crude Oil binary option that expires at 2:30 pm ET today, you would have a maximum profit of the $14.50 you initially receive for the sale, with a maximum loss of $85.50 should Oil rise to close above the strike price in the next 7 hours.

While you would be risking about $5.90 for every potential $1 in profit for this trade, you have almost a full dollar that the price of Oil could move against you before reaching your strike price. It’s also worth considering using a mental stop to exit the position if Oil trades back up to your strike price at any point prior to expiration. If you used a mental stop you could dramatically cut down on your possible risk while still having almost a full dollar that Oil could move against you before having to exit the position at a loss.

If you were looking for a better risk vs. reward set-up for another bearish trade in Crude Oil, then you could choose to sell a binary below the current market, essentially out-of-the-money. The .618 retracement of yesterday’s rise in the price of Crude Oil rests at about the $48 price point. If you felt that Crude Oil could make a run for that level today then you could sell the > $48 binary option for $68 with a maximum risk of $32. In this trade you would be risking $1 for every $2.12 in potential profit if the binary option expired in-the-money as of 2:30 pm ET today (expiring in-the-money would mean Crude Oil closing at $48 or below as of 2:30 pm ET).

On the flip side, if you were bullish Oil and felt like it could bounce off the current .382 level of around $48.50, you could buy a binary option above or below the current market depending on your desired risk and market expectation.

Nadex offers many great binary option markets in indices, commodities, and currencies. Check out their markets by opening a demo account today to see if their products could add to your trading portfolio and increase your profitability.

Note: Exchange fees excluded for calculations.

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