USING BINARIES FOR SHORT TERM DIRECTIONAL TRADING

Transcription

Using Binaries for
Short Term Directional Trading
Using Binaries for Short Term Directional Trading
Binaries can be used to take an intra-day directional view on underlying markets, allowing the trader to go long or
short in a market for a fraction of the margin necessary when trading more conventional contracts.
And the usual benefits of Binaries apply – a trader’s risk is strictly capped without the danger of being stopped out
by a temporary adverse move.
This will show you how to use Binaries, either singly or strategically combined, to tailor your exposure to an underlying market.
As an example, let’s look at Nadex’s “US 500” Binaries, which settle based on an expiration value calculated by
reference to the CME® E-mini® S&P 500® Futures† .
In this hypothetical example, the CME E-mini S&P 500 Futures for March are trading at 1252.00. The recent price
action of these futures, as seen in the graph below, leads you to believe that the market has just broken through some
short term resistance at the 1250.00 level. You believe that over the next couple of hours a market rally of a further
5-10 points is significantly more likely than a drop back below 1250.
Possible short term break out
Current level 1252
Possible resistance
level 1250
12pm
1pm
2pm
†S&P 500 is a registered mark of the McGraw-Hill Companies, Inc. CME and E-mini are registered marks of the Chicago Mercantile Exchange
Inc. Nadex is not affiliated with these organizations and neither they nor their affiliates sponsor or endorse Nadex or its products in any way.
Futures trading and options trading involve risk, which may result in financial loss, and are not suitable for everyone. Any trading decisions that you may make are
solely your responsibility. The trading activity and other information presented herein are for informational purposes only. The contents hereof are not an offer, or a
solicitation of an offer, to buy or sell any particular financial instrument offered on Nadex.
Consider the ladder of end-of-day (expiration at 4:15pm
ET) US 500 Binary contracts typically available on Nadex:
These prices can be viewed as consensus probabilities
generated by Nadex market participants. So, for instance,
the generality of Nadex traders perceive only 15-18%
chance of the US 500 settlement being higher than 1256
at the end of the day. And they believe that the probability
of the market holding above 1250 at the end of the day is
between 66.9% and 70.4%.
If you believe in a 5 point rally by the end of the day, to
Contract
Bid
Offer
Daily US 500 (Mar) > 1268
-
2
-
2.1
-
2.8
3
6
15
18
38.3
42.3
66.9
70.4
87.3
90.3
96.2
98.9
97.6
-
98
-
98
-
2 hours to expiration, futures trading at 1252.0
approximately 1257, a strategy you could use is to buy the
“>1256” contract at 18. For each contract purchased you would be risking $18 to potentially make a profit of $82.
If you perceive the potential for a rally of around 10 points you could buy the “>1259” contract at 6. In this case,
for each contract purchased, you would be risking $6 to potentially make $94. Or you might even buy the “>1262”,
risking $2.80 to potentially make a profit of $97.20.
Taking a less bullish view, if you believe the market will simply hold above the key 1250 level, you could buy the
“>1250” contract at 70.4, risking $70.40 to potentially make a profit of $29.60.
Contract
Bid
Offer
-
2
-
2.1
-
2.8
3
6
15
18
38.3
42.3
66.9
70.4
87.3
90.3
96.2
98.9
97.6
-
98
-
98
-
Back a strong (approx 10 pt) rally by buying one
of these contracts - very small risk, very large
potential rewrad for an outcome the market
believes is very unlikely
Back a moderate (approx 5 pt) rally by buying
one of these contracts - small risk, large potential rewrad for an outcome the market believes
is pretty unlikely
Back any kind of rally, and still profit eve if there
is a small fall, by buying this contract - large
risk, small potential reward for an outcome the
market believes is somewhat likely
Examples do not include fees and commissions. Examples assume all positions are entered into by trading at the available offer price rather than working orders at a
more favorable level.
The following examples show the kinds of P&L profile you can generate with these and other strategies.
LONG 5 LOTS OF “>1256” @ 18
500
400
Potential profit
on 5 lot position
(=$410)
300
200
100
0
Potential loss
on 5 lot position
(=$90)
1247
-100
1250
1253
1256
1259
1262
1265
Current market
(=1252)
-200
Collateral required to enact this intraday binary strategy: $90
Contract
Bid
-
2
-
2.1
-
2.8
3
6
15
18
38.3
42.3
66.9
70.4
87.3
90.3
96.2
98.9
97.6
-
98
-
98
-
In this strategy, going long the “>1256” contract,
Offer
you would be backing the underlying market to be
more than 4 points higher by the end of the day. The
consensus of other Nadex participants is that this is
Buy 5
only 15-18% likely.
Assuming you hold the position until expiration,
each contract purchased would risk $18 to potentially
make $82 (you buy at 18, and final settlement must
be either 0 or 100). In this example 5 lots are being
traded, so your maximum possible loss (and total
required collateral) is 5 x 18 = $90.
Note that you do not have to hold the position until expiration – you might choose to exit if the market moves up a few
points in the short term and you do not believe the rally will be sustained. The price at which you could exit under these
circumstances will depend on the precise size of the rally and the amount of time still remaining until expiration, as these
two factors will shape the new probability that the “>1256” outcome will occur.
LONG 5 LOTS OF “>1253” @ 42.3
400
300
Potential profit
on 5 lot position
(=$288.50)
200
100
0
Potential loss
on 5 lot position
(=$211.50)
-100
1247
1250
1253
1256
1259
1262
1265
-200
Current market
(=1252)
-300
Contract
Bid
Offer
-
2
-
2.1
-
2.8
3
6
15
18
38.3
42.3
66.9
70.4
87.3
90.3
96.2
98.9
97.6
-
98
-
98
-
This strategy, going long the “>1253” contract,
backs the underlying market to be more than just 1
point higher by the end of day. This is less bullish
view than the previous strategy and the consensus of
Buy 5
Nadex participants is the outcome is more probable,
at a likelihood of 38.3-42.3%.
Because success is more likely, your risk/reward
ratio is less favorable than in the previous example.
each contract purchased would risk $42.30 to poten-
tially make a profit of $57.70 (you buy at 42.3, and
final settlement must be either 0 or 100). In this example 5 lots are being traded, so your maximum possible loss
(and total required collateral) is 5 x 42.3 = $211.50.
Once again, though, you are not tied in to risking the whole $211.50 by waiting until expiration. If you feel the
position is not working out (or if it is going right and you want to take an early profit) you can place an order to exit
early. Provided your order is placed at a level which is attractive to out participants, you can close out your exposure
to cap a loss or lock in a profit.
LONG 5 LOTS OF “>1253” @ 42.3
400
300
Potential profit
on 5 lot position
(=$288.50)
200
100
0
Potential loss
on 5 lot position
(=$211.50)
-100
1247
1253
1256
1259
1262
1265
-200
Current market
(=1252)
-300
Contract
1250
Bid
-
2
-
2.1
-
2.8
3
6
15
18
38.3
42.3
66.9
70.4
87.3
90.3
96.2
98.9
97.6
-
98
-
98
-
This is an example of an extremely bullish strategy,
Offer
backing the market to be more than 7 points higher
at the end of the day by going long the “>1259”
Buy 5
contract. The consensus of Nadex participants is
that the outcome is very improbable, at a likelihood
of just 3-6%.
Because success is considered so unlikely by other
participants, your risk/reward ratio is far more
favorable than in either of the previous examples.
each contract purchased would risk $6 to potentially
make a profit of $94 (you buy at 6, and final settlement must be either 0 or 100). In this example 5 lots are being
traded, so your maximum possible loss (and total required collateral) is 5 x 6 = $30.
A full payout in this example is, by definition, extremely unlikely. But note that a short term rally of a few points
may, depending on precise timing and magnitude, lift the consensus bid above 6 and allow an opportunity to take a
profit on the strategy, even if the final goal of a 7 point rally is never achieved.
LONG 5 LOTS OF “>1253” @ 18
400
300
Potential profit
on 5 lot position
(either $61.40
or $361.40)
Potential loss
on 5 lot position
(=$138.60)
200
100
0
-100
1247
-200
1253
1250
1256
1259
1262
1265
Current market
(=1252)
Collateral required to enact this intraday binary strategy: $138.6
Contract
Bid
Here is a more elaborate strategy designed to
Offer
-
2
-
2.1
-
2.8
3
6
spread the risk of taking a bullish Binary view. In
this case the 5 lot position is split over two contracts, the “>1253” and the “>1256”.
15
18
Buy 3
38.3
42.3
Buy 2
66.9
70.4
87.3
90.3
96.2
98.9
(in the event of a settlement level above 1253 but
97.6
-
98
-
no higher than 1256) or $361.40 (in the event of a
98
-
If you do not exit early and instead hold the strategy
to expiration you stand to make a profit of $61.40
settlement level above 1256). If the market finishes
at or below 1253 you will lose $138.60.
LONG 5 LOTS OF “>1256” @ 42.3, LONG 1 LOT OF “>1256” @ 18, LONG 3 LOTS OF “>1259” @ 6
500
400
Potential profit
on 5 lot position
(either $21.70 or
$121.70 or
$421.70)
300
200
100
0
Potential loss
on 5 lot position
(=$78.30)
-100
1247
1250
1253
1256
1259
1262
1265
Current market
(=1252)
-200
Collateral required to enact this intraday binary strategy: $78.3
Contract
Bid
Here is an example of a 3 contract strategy
Offer
designed to ratchet up a payout in the event of a
-
2
-
2.1
-
2.8
3
6
Buy 3
large rally. In this case the 5 lot position is split
15
18
Buy 1
38.3
42.3
Buy 1
66.9
70.4
87.3
90.3
96.2
98.9
97.6
-
98
-
98
-
over three contracts, the “>1253”, the “>1256” and
the “>1259”.
Here your maximum risk, should you choose to
hold the position until expiration, is capped at
$78.30. A settlement level above 1253 will result
in a profit of either $21.70, $121.70 or $421.70,
depending on just how strong the market is by the
end of the day.
You can also us Binaries in conjunction with conventional futures contracts. The final few examples look at the effect of going long of a single lot of the CME E-mini S&P 500 Futures, while providing temporary protection against
a sudden adverse move by shorting some US 500 Nadex Binaries.
Possible short term break out
Current level 1252
Possible resistance
level 1250
12pm
Contract
Bid
1pm
Offer
-
2
-
2.1
-
2.8
3
6
15
18
38.3
42.3
66.9
70.4
87.3
90.3
96.2
98.9
97.6
-
98
-
98
2pm
If you go long of the CME E-mini S&P 500
Futures, selling some of these Binaries can
provide protection against an unexpected short
term drop in the market
-
SHORT 5 LOTS OF “>1250” @ 66.9, LONG 1 LOT CME E-MINI S&P 500 FUTURES @ 1252
400
300
Current market
(=1252)
200
100
0
-100
1238
1244
1241
1247
1250
1253
1256
-200
400
Standalone Futures P&L
200
Net Strategy P&L
0
-200
1238
1244
1241
1247
1250
1253
1256
Standalone
Binary P&L
-400
-600
-800
Strategy boosts futures P&L
by $334.50 in this region
Contract
Bid
Offer
-
2
-
2.1
-
2.8
3
6
15
18
38.3
42.3
66.9
70.4
87.3
90.3
96.2
98.9
97.6
-
98
-
98
-
Strategy reduces futures P&L
A short position in the “>1250”, taken
out a a price of 66.9, means that for each
contract you stand to make $66.90 for a
risk of $33.10.
Sell 5 (and buy
1 lot of futures)
Going short of 5 lots, in conjunction with
a long position of 1 lot in the futures,
results in boosting your P&L by $334.50
in the event of a settlement at or below
1250. This comes at the cost of reducing
your P&L by $165.50 in the event of a
settlement above 1250.
Example does not include fees and commissions. Example assumes all Binary positions are entered into by trading at the available bid price rather than working orders
at a more favorable level. Payout profile assume futures position is closed out at a level identical to the Nadex-calculated US 500 Expiration Value.
SHORT 5 LOTS OF “>1247” @ 87.3, LONG 1 LOT CME E-MINI S&P 500 FUTURES @ 1252
500
400
300
Current market
(=1252)
200
100
0
-100
1238
1244
1241
1247
1250
1253
1256
600
400
Net Strategy
P&L
200
0
-200
1238
1241
1244
1247
1250
1253
1256
Standalone
Binary P&L
-400
-600
-800
Contract
Bid
Offer
-
2
-
2.1
-
2.8
3
6
15
18
38.3
42.3
66.9
70.4
87.3
90.3
96.2
98.9
97.6
-
98
-
98
-
Cheaper (but less comprehensive)
protection can be engineered by taking a
short position in the “>1247” at a price
of 87.30, leaving you with a per-contract
potential profit of $87.30 and a maximum
possible per-contract loss of $12.70.
Sell 5 (and buy
1 lot of futures)
Going short of 5 lots, in conjunction with
a long position of 1 lot in the futures,
results in boosting your P&L by $436.50
in the event of a settlement at or below
1247. This comes at the cost of reducing
your P&L by $63.50 in the event of a
settlement above 1247.
SHORT 1 LOTS OF “>1250” @ 66.9, SHORT 2 LOTS OF “>1247” @ 87.3, SHORT 2 LOTS OF “>1244
@ 96.2, LONG 1 LOT CME E-MINI S&P 500 FUTURES @ 1252
500
400
300
Current market
(=1252)
200
100
0
-100
1238
1241
1244
1247
1250
1253
1256
600
400
Net Strategy P&L
200
0
-200
1238
1241
1244
1247
1250
1253
1256
Standalone
Binary P&L
-400
-600
-800
by $33.90 or $233.90 or
$433.90 in this region
Contract
Bid
Offer
-
2
-
2.1
-
2.8
3
6
15
18
38.3
42.3
66.9
70.4
87.3
90.3
96.2
98.9
97.6
-
98
-
98
-
Sell 2 (and buy
1 lot of futures)
Again, many more elaborate strategies
are possible. In this one the 5 lot position
has been split between 3 contracts,
giving extensive downside protection to
your long E-mini position, at the cost of
reducing P&L b $66.10 in the event that
all the Binaries settle in the money.

USING BINARIES FOR SHORT TERM DIRECTIONAL TRADING

Transcription

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