Traders who are familiar with binary options generally believe that they are instruments that are best traded in markets that are volatile. The all or nothing settlement nature of the options usually makes traders think that they need to be trading them in markets that are expected to move a lot. This means that when volatility declines traders do not know how to take advantage of slow or choppy price action with binary options. Binary options are actually very well suited for trading in markets like this. Below we will go over two trade examples to illustrate this point.
The trade setups will be meant to profit if markets stay inside of a certain intraday range. We will look at a trade setup using the options on CME E-mini S&P 500 futures and then a setup using binary options. We will see that the binary options setup gives a trader a far better reward to risk setup and is far easier to manage. The idea behind the trade is to set up a position that profits if the market trades sideways into the close. The first setup we will look at is a short at the money straddle in the futures.
With futures at 2310
Possible Trade: Selling the Feb 10th Weekly 2310 Straddle for 5.00
Reward: $250 per 1 lot
Breakeven: 2305 and 2315
We can see here that the short call component of this spread exposes a trader to an unlimited level of risk. This means that we can’t even calculate a risk to reward ratio. While this is a risky trade it does still give the trader the potential to make a nice profit if the market stays inside of the defined range through the close. Let’s compare this to a binary setup. The goal of the binary setup will be the same, try to make a profit if the market trades in a range.
Binary Trade: Buying the US 500 >2305 Daily Option for $80 and selling the Us 500 > 2014 Daily Option for $30
Risk: $50 per 1 lot
Reward: $50 per 1 lot
Here a trader is using the same levels that they had in the futures options trade to set up a binary options trade. The main difference is that the risk in this binary trade is easy to define. We are also able to determine our reward to risk ratio. In this case we are risking $50 to make $50. This is a far better setup than the options on futures trade. The above trade is a great example of how a trader can use the flexibility of binary options to set up trades that have the potential to profit in any type of market condition.