Why Binary Options are the Perfect Vehicle for Trading the Fed

Why Binary Options are the Perfect Vehicle for Trading the Fed
Why Binary Options are the Perfect Vehicle for Trading the Fed
Why Binary Options are the Perfect Vehicle for Trading the Fed Getty Images

Today at 2 pm ET the FOMC will announce whether or not there will be an increase in the Fed Funds rate this month. Most market participants have priced in a near certainty that they will raise rates as the Fed has telegraphed for months that they would raise in the December meeting. The unemployment rate has also fallen to 4.6% as of the release of the December jobs number putting it well below the Fed’s targets. There are some who believe Donald Trump’s presidential victory and the expected fiscal stimulus from his administration could color the FOMC’s decision but anything today but a rate raise would be largely unexpected. With that being said there isn’t a lack of risk in trading ahead of the announcement. As with any catalyst event there are risks of a black swan event and special implied volatility dynamics to consider before putting on a trade. Luckily, binary options give a trader the perfect vehicle for trading events like this. We will illustrate some of the reasons below.

Binary options allow a trader to trade a very specific target with an unchanging level of risk and reward. This is extremely beneficial ahead what could potentially be a large move. The settlement nature of binary options allows a trader to put on a trade with a known reward to risk ratio at a very specific level. This is especially helpful to traders who are trading ahead of macro data events as they can develop an upside or downside target then put a trade on without worrying about slippage or blowing out their account. For example, todays at the money straddle in the CME E-mini S&P 500 futures is trading around 14 points. With the market trading at 2265.00 we can determine that the expectation is for the futures to rally to 2279 or sell off to 2251 by the end of the day. Depending on a traders market view they can then find binary options trades that line up with these levels.

Trade example: Trader buys the US 500 > 2277 Daily Binary Option for $20
Risk: $20 per 1 lot
Reward: $80 per 1 lot

This trade gives a trader a great reward to risk setup if the market rallies to the upside target by the close. A trader who wants to get short could consider the trade below.

Trade example: Trader sells the US 500 > 2253 Daily Binary Option for $80
Risk: $20 per 1 lot
Reward: $80 per 1 lot

In this case a trade would capture the $80 they sold the option for id the market closes at or below the downside target. Since the options can only settle at $100 or $0 the trader will always know what their exposure is. This is a huge benefit ahead of a catalyst event. The underlying instruments would never be able to give a trader the certainty of the risk and reward setups that you see above. This dynamic, along with the smaller contract size and lower risk levels make binary options the perfect product for navigating the market on catalyst days like today.

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