When first trading binary options, most traders choose one side of the trade or the other, and look to profit if their binary option expires in-the-money for full value of $100. As you become more comfortable with the binary option market, there are various ways to trade multiple contracts simultaneously to profit from underlying moves. One methodology to consider is trading both sides of a binary option market to profit from volatility in either direction.
If you’re looking for a large move in either direction then binary options provide the ability to lock in defined risk while setting up trades than can profit from underlying moves in both directions of an underlying market. With the Fed set to make an announcement tomorrow afternoon regarding interest rates and Non-Farm Payrolls due out Friday morning, not to mention the stream of earnings all week and election anticipation, Gold has plenty of news driven events that could move the price of this precious metal before Friday’s close.
Here we see a chart of the indicative index, which is based off the December Gold COMEX/NYMEX Futures price, as of about 7:25 a.m. ET this morning. Listed along the right axis are the weekly binary strikes with their relative market quote.
If you happen to be bullish Gold for the week then you could buy a binary option above or below the current market depending on your target expectation. Bearish? Then you can sell any of the binary option strike depending target and the risk vs. reward desired.
Of course having no directional bias but expecting volatility, you could consider trading both sides of the market, while keeping your risk defined, and profit from moves in either direction!
One possibility of a 2 sided trade could be buying the >$1,307.50 Gold binary option for $16 while simultaneously selling the >$1,267.50 Gold binary option at $84 (you have $16 of defined risk when selling this binary option at $84). Both of these binary options expire at 1:30 p.m. Friday. With a combined $32 at risk when initiating the two trades, you stand to make $68 if either side of the trade expires in the money.
Even when making 2 trades on both sides of the market, you still only risk $1 for every $2.12 of potential profit if either side of the trades expires in the money. With Gold currently trading at $1,287.407, the underlying precious metal would have to move more than about $20 in either direction prior to expiration for this trade to be profitable.
Binary options can provide traders with a multitude of strategies, all of which include defined risk. The next time you’re scanning the market for profitable trades, consider the binary option on the Nadex Exchange. You can open a demo account with $25 K of practice funds to see for yourself the types of multi-leg trading strategies that are possible.
Note: Exchange fees excluded for calculations.