The U.S. dollar and crude oil have both resumed their uptrend and are up over 1%, and the S&P 500 futures is back high by .75% today thus far. Meanwhile, gold was higher in the overnight, but has since traded lower; but at the moment the Jan futures are down just a modest $2.70, currently trading at 1149.20.
Gold ended the year weak as the other mentioned markets were rallying. These trends are looking like they are starting to continue into the first of the year, which would lead one to possibly consider that gold futures should be lower than where they are at the moment.
Trading the gold futures in the U.S. can be challenging as it requires $6,600 of margin. In addition, each tick in gold futures is .10 which amounts to $10, making it difficult for new traders and those with small accounts, and sometimes even experienced traders, to properly position themselves in this market.
This is where binary trading comes in. With binary options, each contract has a base value of $100, and traders know the exact risk of their positions up front, and can enter trades with a minimal amount of capital. To illustrate this, we will look at a possible trade idea from the viewpoint of a trader who is bearish this market. Please note that this example is not a recommendation, but rather an illustration of how to implement binary options into a trading strategy.
Gold weekly binary options will expire at Friday’s 1:30 pm EST close. Currently, the 1141.50 strike is $7.70 out-of-the-money. The bid for this strike is currently at $63.25. This means you could sell this option for the $63.25 bid per contract and collect that amount as profit if gold settles the week below the 1141.50 strike. The risk is the difference between the sale price and the $100 contract value which amounts to $36.75 in risk. If gold follows a bearish trend by end of week and the trade is successful, this trade would return about 175% on risk.
If you thought 7.70 was too far out of the money, then you could consider a higher strike which would result in a higher initial cost or if you thought that $36.75 was more than you wanted to risk then you could look at a lower strike which would have a lower probability of finishing in the money at expiration.
Binary options allows trades on market viewpoints for less than $100, with a clearly defined goal, risk and reward. Binary options can be used in many ways to capitalize on any market viewpoint – they can be traded on bearish or bullish viewpoints as well as sideways views or straddles that have the potential to profit on a solid move in either direction.
Note: Exchange fees not included in calculations.