As of about 8:30 am ET this morning Oil is trading at about $43.47 a barrel when looking at the September Futures contract. Here is a chart of the indicative Index, which is based off the NYMEX Futures Oil contract as of 8:30 am ET this morning with the daily binary options on the Nadex exchange listed along the right axis. The daily binary options on Oil expire at 2:30 pm ET today, leaving about 6 hours until expiration for these specific contracts.
While binary options offer a simple way to trade directionally by choosing whether a specific Commodity, Index, or Foreign currency will close above or below a certain, they also offer opportunities to profit from flat markets if you can accurately anticipate periods of low volatility with a directional bias included.
If you felt that Oil was going to have a relatively calm Friday of trading then one trading possibility could be to buy a binary option below where the current market is trading or sell a binary option above where the current market is trading.
If you were bullish but expected a relatively calm Friday in the Oil market, then one trade to examine would be to purchase the >$43.00 binary option at $80.00. You would have a maximum risk of $80.00 that you initially pay with a maximum profit of $20.00 should Oil close above $43.00 as of 2:30 pm ET on Friday. While you’d be risking $4 for every $1 of potential profit, you also have $0.47 that Oil could move against your position while still remaining profitable.
You could also choose to add a mental stop should Oil not trade according to your expectations on Friday and exit the position if it traded back to the $43.00 price area at any point prior to expiration. By exiting the binary option at or near it’s strike price you would be able to exit the position near $50 cutting your risk down substantially. If you exited at $47 (leaving room for a bid/ask around $50) you could cut your planned risk to only $33 while still having the same $0.47 that Oil could have to move against you before locking in a loss.
One the reverse side, if you were bearish the Oil market for Friday trading action but still anticipated a relatively calm trading day then you could choose to sell the $44.00 binary option at $25. Your maximum profit would be capped at the $25 you initially sell the binary option for and your risk would be defined at $73 should Oil climb to close above $44.00 on Friday. While you are risking exactly $3 for every potential $1 in profit for this particular trade, Oil would have to trade more than $0.53 against you within the next 6 hours to have this trade show a loss.
You could also employ a similar planned stop if Oil were to climb to the $44.00 price level prior to expiration to cut your potential losses. The next time you’re scanning the Oil and commodity market for possible trade set ups, consider binary options as another possible trading vehicle that could add to your profitability as a trader.
Note: Exchange fees excluded for calculations.