Is there a way for you to trade to do this and the answer is yes. There are binary options which are based on various stock indices allows a way to trade where both your risk and profits are capped.
This article will explain how this can be done, things to watch out for and some commonly made mistakes.
The first thing you need to have a market opinion either from technicals, fundamentals or both. You would pull up a binary ladder chart to determine which strike level and duration matches your bias. On Nadex you would have four major US indices to choose from:
- US Tech 100 based on E-mini NASDAQ 100 Index Futures
- Wall Street 30 based on the E-mini Dow Futures
- US 500 based on the E-mini S&P 500 Index Futures
- US SmallCap 2000 based on Mini Russell 2000 Index Futures
The binary contracts expire in as little as 20 minutes, as well as two hours, daily and weekly. As you determine which binary strike price would be best for your trade, you also have to consider how far the underlying market needs to move or not move within your expected time frame.
Because the market is moving up, some traders assume they have to buy, so they buy the cheapest binary they can find. Then, since the market continued to go up, they wonder why their contract didn’t expire profitable? One mistake traders make is seeing the market going up, and thinking they chose the proper direction, but the market does not move all the way up to the strike price they bought, prior to expiration. They chose the direction properly but did not choose the right binary. Be sure to determine what your charts, indicators and systems are telling you about the possibility of the market reaching your strike price before expiration.
As an example, let’s suppose US Tech 100 is currently trading at 4791. You consider the binary >4797, which has a nice low risk of $30 with a potential reward of $70. However, the market is starting to hesitate. How likely is it that the market will move up to 4797 before expiration in one hour and ten minutes?
Next you consider >4789. It has a $70 risk with a potential $30 reward. As long as the market stays above 4789, it will be profitable. If the market hesitates where it is until expiration, it will expire in the money. To have even more insurance for your trade, you could consider >4785, but the risk is $85 for only a potential $15 reward.
Your risk and reward might be better choosing an out of the money binary, but if you choose a strike a little further down the strike ladder, you would have some insurance. You gain some room for movement. It’s not always the smartest thing to choose the cheapest binary. There are times when clear momentum is being indicated it could work out for you, but sometimes it might not. Determine what is more important to you. Do you want a little more insurance, which requires you to put up a little more money or are you looking at the risk/reward? The expected move of the market plays a big part in your decision. It can be tricky to figure out.