The ups and downs of a volatile market can seem very challenging. This movement can cause a trader to long for a simple trending market or even a boring flat market. However, movement in the market is what makes trading what it is. Some traders get extremely excited when faced with a volatile market. They seem to live for the challenge.
When faced with a volatile market, would you trade an in the money contract or possibly a deep in the money contract? Would you choose an $80 risk binary or would you want something with a lower risk? For most traders, it depends on the time frame and the markets being examined. Some might even consider going out of the money because of the lower risk involved.
In a volatile market, you are usually expecting movement. You would not want to use a strategy for a flat market. In order to trade an out of the money contract, you must have movement. There has to be enough time before expiration to allow the movement to transpire. The image below provides a visual to explain the differences between in the money, at the money and out of the money contracts.
If movement is expected, an out of the money contract is the perfect vehicle to use. It has a lower risk and a higher possibility, but a lower probability of settling in the money, unless the market moves fast enough and far enough in your direction.
If you anticipate that there is going to be movement, but you don’t know which direction the market will move, you can place a strangle. Using this strategy, you are simultaneously selling and buying two cheap out of the money binary contracts. The assumption is that one side will profit and the other side will not Make sure your combined risk is low enough to allow profits.
Volume needs to exceed expectation with plenty of movement. This is not a hold-until-expiration strategy. You need to know your overall risk. For example, suppose the buy side risk is 16 and the sell side is 14 for an overall risk of 30. Once one side is up the amount of the risk, you exit that side. One side loses, but the move covers the cost of the losing side. Reaching break even on the side that is up, it moves far enough to profit. Leave the other side on in case the market swings back allowing for profit on that side as well. Manual stops are not necessary since the risk of the trade is low.
When there is volatility in the markets, don’t sit on the sidelines and wait it out. Be sure to have plenty of strategies available so you can trade in all types of market conditions.