Using Market Profile with Binary Options

Using Market Profile with Binary Options
Using Market Profile with Binary Options
Using Market Profile with Binary Options Getty Images

Traders have many choices In the field of technical indicators.  Among the most popular tools is the Market Profile indicator, sometimes called Time Price Opportunity, which measures where a market tends to trade over a certain period of time. It provides an idea of price areas in which traders have a greater or lesser interest from a historical viewpoint.

The chart below shows a the Time Price Opportunity profile on the right-hand side. This example uses an hourly bar chart of the S&P 500 futures during January 2017, and shows that traders have traded price the most where the profile shows the most blue.  

The red highlighted line at 2263.00 shows the price that has been traded the most this month on the S&P, otherwise known as the point-of-control or POC, while the yellow highlighted lines at 2258 and 2271 are known as the value areas.  Typically about two thirds of the market action takes place in between these two value areas; therefore, they may be used as targets, as well as support and resistance.

Using Market Profile with Binary Options

Time profiles offer many possibilities as a trading tool, but today we will look at use this indicator to find opportunities when trading CFTC-regulated binary options. Each of these options have a base value of $100 per contract. We will look at examples of how to trade the current market from both a bearish and a bullish perspective.  Please note that the examples used are meant to show how to implement binary options with this trading strategy and are not intended to be recommendations of any specific trade.

Currently the S&P 500 futures have just broken through the point-of-control at 2263.00 and appear to be looking weak.

On the table of available option strikes below, bearish traders will find at least two options that may work with this time profile. The 2263.00 daily binary option strike coincides exactly with the POC, and can currently be sold for $43.75.  This means that a daily settle below this strike will result in a profit of the selling price, $43.75, while the risk would be the difference between the sale price and the $100 base value, which amounts to a risk of $56.25.

Using Market Profile with Binary Options

A more aggressive bearish trader may wish to target the low value area marked in yellow on the time profile chart, which is around 2258.00.  To do so, a trader could sell the 2257.00 strike for $72.00 per contract, risking $28.00 to potentially earn $72.00 if the S&P settles below 2257.00 at the end of the day.

Alternatively, bullish traders believing this index will reverse and close above the POC could buy the 2263.00 strike for $47.50.  This trade risks the amount paid on the option ($47.50) to earn the difference between the buy price and the $100 value, which would equal a profit of $52.50 if the S&P closes the day above the POC.  

Traders with a more aggressive bullish viewpoint could risk fewer dollars going into the trade for a greater potential reward by targeting the higher value area in yellow, which is at 2270.00.  These traders could buy the 2269.00 option for $21.75, risking that amount to potentially earn $78.25 on a settlement above the strike price.

These examples show just a few ways to use one indicator, time profiles, to implement binary options trades. Binary options provide many opportunities to profit as they provide traders the ability to craft a strategies based on their own viewpoints, always with limited risk and defined risk to reward ratios.

 

Note: Exchange fees not included in calculations.

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