Sideways Markets are Binary Opportunities

Sideways Markets are Binary Opportunities

The headline on Bloomberg of Monday morning's stock market activity was "U.S. stocks fluctuate on earnings reports before Fed Fischer." Fluctuating markets might show uncertainty or mixed opinions among the bulk of investors, but it doesn't mean you need to be hesitant to trade. Binary options give you an edge in fluctuating or sideways markets.

Sideways Markets are Binary Opportunities
Sideways Markets are Binary Opportunities Getty Images

Based on the futures prices for US Treasury bonds and bills, most analysts now say that the Federal Open Market Committee will raise interest rates at its December meeting, if not next month. The next increase would raise the effective fed funds rate to an average 0.625 percent, or a range of 0.50 to 0.75. 

Right now, the stock market's main obsession seems to be figuring out just how probable that rate hike is. On Monday, that included waiting for and then trying to analyze—maybe overanalyze—remarks by Federal Reserve Vice Chairman Stanley Fischer. Fischer didn't help as much as he might have. He is on the record as advocating for a rate hike. But on Monday he told the Economic Club of New York, "it is not that simple," and talking about "factors over which the Federal Reserve has little influence." 

It was hardly a rallying cry and in response, stocks hardly rallied. Instead, they remained within the narrow, sideways channel they have been in since the S&P 500 dropped roughly 40 points last Tuesday, October 11. If you are a trend-follower in the usual sense of the world, looking to ride big moves like that 40-point drop, you didn't see moves much bigger than 15 points since that time. And before October 11, the stock market hung out in a sideways channel at a higher level for about a week. 

Sideways Markets are Binary Opportunities

 

In markets like this, traders can do two things to find better opportunities. First, you can zoom in and look for micro-trends within the sideways range, moves from the support level to the resistance level and back down. Trading smaller moves like those require thinking on a faster time frame. It isn't just about being fast or jumping in and out impulsively. That can lead to mistakes and poor entries. So-called "scalping" isn't any more impulsive than slower trading styles—not if you do it right. 

Second, you can use the all-or-nothing structure of binary options to your advantage. A binary options is a simple yes/no question about where the market is, relative to a price level known as a strike price. Let's first look at the simple approach of buying or selling a binary and holding to expiration. If you're a buyer, you want the binary to expire above your strike price. If you sell, you want it to expire below your strike price. If that happens, your binary is expiring "in the money" and gets you $100. 

In order to profit, you just need to have bought or sold it for less than $100. To get a substantial profit, you'll try to buy or sell for much less than $100. 

Remember that you don't have to buy or sell an "out-of-the-money" binary to profit from it expiring in the money. You could buy when the market is above the strike price and still pay less than $100. It gains value as the time expires. 

You only need it to be on the Yes side of the strike price at expiration. That's true whether you buy or sell. And what time does a Nadex US 500 (based on the S&P 500 futures price) expire? 

What time do you want? Nadex has multiple daily contracts with expirations throughout the day. For even more precise short-term focus, Nadex offers 20-minute binaries with expirations every 20 minutes. 

The hallmark of sideways channels is short-term movements. Now you can trade those short-term movements with a targeted short-term financial instrument that offers an unambiguous yes or no result within minutes. 

 

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