Traders who use binary options find them very appealing as opposed to the buy or sell of the traditional futures markets. When binary trading, you can choose how bullish or bearish you are within a certain time-frame. In this article we will look at possibilities of binary options strategies that traders could have used in the scenario above, yesterday’s ESM16 close. The options discussed are offered by a CFTC-regulated exchange and have a base value of $100 per contract.
The specific options used in this example expired at the daily 4:15 EST close yesterday. One trader noticed that the index tends to close at a new high on the day lately, and was considering buying either the 2118.00 or 2121.00 strike. This trader decided to buy the further out-of-the-money option, 2121.00, because he wanted to have very low risk (of dollars invested) to high reward potential. He purchased this option at the offer of $13.00 per contract. His purchase price defined his risk, while the potential reward was the difference between that amount and the $100 contract value ($100 – $13), or a potential profit of $87.00. This trade did not succeed, but the trader was comfortable knowing risk was limited and understanding the nature of this low-probability, high-reward trade (if successful, the reward would have been more than a 6 to 1 return on his investment).
The second trader’s view was just slightly bearish; she believed that the underlying future would go lower into the close. She chose to sell the 2115.00 strike, which was just one point lower than current price, at the $58.50 bid. When selling these options, the potential profit is limited to the selling price, and the risk is the difference between that price and the $100 value ($100 – $58.50), or a risk of $41.50 per contract in this circumstance. So she was willing to earn of 125% on risk for a close just a point lower than the trading price of 2116.00 at the time she sold the option. Her trade was successful, as the ESM16 closed the day at 2110.50.
Trading binary options, these traders could have exited their positions at any time before the close to secure an early partial profit or to reduce risk. As you can see from the contract table above, multiple contracts were offered with other strikes, giving traders various opportunities to craft strategies based on their own unique market views. Binary options are offered on several instruments, including equity indices, commodities and currencies; and they are offered with multiple expiration time frames from weekly, daily, hourly, and even intra-hourly. This makes them a very adaptable trading product.
This is why binary options are growing at a fast pace in the United States and around the world, as regulated options give traders the control to go deeper than the traditional futures markets and trade today’s markets with today’s tools.
Note: Exchange fees not included in calculations.