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Binary Options Founded in 1807, John Wiley & Sons is the oldest independent publishing company in the United States With offices in North America, Europe, Australia and Asia, Wiley is globally committed to developing and marketing print and electronic products and services for our customers’ professional and personal knowledge and understanding The Wiley Trading series features books by traders who have survived the market’s ever changing temperament and have prospered—some by reinventing systems, others by getting back to basics Whether a novice trader, professional or somewhere in-between, these books will provide the advice and strategies needed to prosper today and well into the future For a list of available titles, visit our Web site at www.WileyFinance.com Binary Options Strategies for Directional and Volatility Trading ALEX NEKRITIN John Wiley & Sons, Inc Cover Design: John Wiley & Sons, Inc Cover Image: (c) Andy Hair/iStockphoto Copyright © 2013 by Alex Nekritin All rights reserved Published by John Wiley & Sons, Inc., Hoboken, New Jersey Published simultaneously in Canada No part of this publication may be reproduced, stored in a retrieval system, or transmitted in any form or by any means, electronic, mechanical, photocopying, recording, scanning, or otherwise, except as permitted under Section 107 or 108 of the 1976 United States Copyright Act, without either the prior written permission of the Publisher, or authorization through payment of the appropriate per-copy fee to the Copyright Clearance Center, Inc., 222 Rosewood Drive, Danvers, MA 01923, (978) 750-8400, fax (978) 646-8600, or on the Web at www.copyright.com Requests to the Publisher for permission should be addressed to the Permissions Department, John Wiley & Sons, Inc., 111 River Street, Hoboken, NJ 07030, (201) 748-6011, fax (201) 748-6008, or online at http://www.wiley.com/go/permissions Limit of Liability/Disclaimer of Warranty: While the publisher and author have used their best efforts in preparing this book, they make no representations or warranties with respect to the accuracy or completeness of the contents of this book and specifically disclaim any implied warranties of merchantability or fitness for a particular purpose No warranty may be created or extended by sales representatives or written sales materials The advice and strategies contained herein may not be suitable for your situation You should consult with a professional where appropriate Neither the publisher nor author shall be liable for any loss of profit or any other commercial damages, including but not limited to special, incidental, consequential, or other damages For general information on our other products and services or for technical support, please contact our Customer Care Department within the United States at (800) 762-2974, outside the United States at (317) 572-3993 or fax (317) 572-4002 Wiley publishes in a variety of print and electronic formats and by print-on-demand Some material included with standard print versions of this book may not be included in e-books or in print-on-demand If this book refers to media such as a CD or DVD that is not included in the version you purchased, you may download this material at http://booksupport.wiley.com For more information about Wiley products, visit www.wiley.com Library of Congress Cataloging-in-Publication Data: Nekritin, Alex, 1980– Binary options : strategies for directional and volatility trading / Alex Nekritin p cm.—(Wiley trading series) Includes index ISBN 978-1-118-40724-0 (cloth); ISBN 978-1-118-41777-5 (ebk); ISBN 978-1-118-52868-6 (ebk); ISBN 978-1-118-42182-6 (ebk) Options (Finance) Futures I Title HG6024.A3N448 2013 332.64'53—dc23 2012032301 Printed in the United States of America 10 This book is dedicated to my parents, Nina and Boris Nekritin Thanks for all your unconditional love and support Without you, none of this would have been possible Contents Foreword xi Preface xiii Acknowledgments xvii PART I Introduction to Binary Options CHAPTER What Are Binary Options? On What Asset Classes Are Binary Options Available? 3 Binary Options vs CBOE (Vanilla) Put/Call Options 10 Advantages/Disadvantages of Binary Options 13 Reasons to Trade Binary Options 14 PART II 17 Binary Options Theory CHAPTER What Does Binary Mean? 19 Components to a Binary Option 20 Long Trading 22 Short Trading 24 CHAPTER Pricing 29 Strike Price 29 Time Value 30 Price as a Natural Market Consensus 32 Reading a Binary Option Chain 35 vii viii CONTENTS PART III Trading Binary Options 41 CHAPTER 43 Binary Options Contract Collateral Margin and Debit Risk of Vanilla Options and Futures 43 Collateral Explained 44 Binary Options Expiration Values 44 Collateralizing a Long Trade 45 Collateralizing a Short Binary Options Trade 50 The Mechanics of a Binary Options Short Trade 50 CHAPTER Settlement 59 Settlement on Binary Option Long Trades 59 Commissions and Fees 73 CHAPTER 75 Entering and Exiting Binary Option Trades Reading Quotes 75 Reading an Order Ticket 76 Exiting Trades 78 Exiting Your Trade before Expiration 81 CHAPTER Keys to Trading Binary Options and More Examples 95 Gold Binary Examples 96 Copper Binary Examples 99 PART IV Binary Options Trading Strategies CHAPTER Volatility Trading Explained Taking a Volatility Long Position (Buying Volatility) 105 107 108 Regulating Success Probability and Payout with Strike Prices 111 Taking a Volatility Short Position (Selling Volatility) 113 Regulating Range and Payout with Strike Prices 116 Max Loss, Collateral, and Max Profit Summary Table 120 Contents ix CHAPTER Binary Option Behavior as Expiration Approaches 123 Understanding Delta 123 Delta and Price 127 CHAPTER 10 Technical Trading Strategies with Binary Options 129 Support and Resistance 130 Breakout Trading 135 CHAPTER 11 Fundamental Trading Strategies with Binary Options 139 News Releases 139 Political Events 144 Speculating on Actual News Releases 147 Economic Data Releases that You Can Speculate On 149 PART V 153 Creating Your Binary Options Strategy CHAPTER 12 Systems with Binary Options 155 Finding Your Edge 155 Proper Trading System Development 156 Back-Testing Binary Options Strategies 158 Three Back-Testing Rules 162 CHAPTER 13 Negative Emotions 165 Greed and Fear 166 How to Handle Negative Emotions 166 Find the Right System for You 168 Practical Steps to Mitigate the Negative Emotions 175 CHAPTER 14 Risk Management 183 The Process 184 Determining Position Size 185 x CONTENTS Risk Management on Option Spreads 190 Relationship between Position Size and Trading Psychology 199 Handling Unexpected Market Volatility 199 Benefits of Binary Options on Trading Psychology 202 Discipline of Expiration 206 PART VI 209 Managing Your Binary Options Account CHAPTER 15 Proactive System Improvement 211 System Cutoffs 212 Drawdown 212 Consecutive Losing Trades 215 Reinvestment Rate 216 Diversification and Account Distribution 220 Intersystem Diversification 220 Account Breakdown 221 PART VII Profiting with Volatility 223 CHAPTER 16 The Volatility Short Trading Rules 225 Premium Collection 226 Rule 1: Cut Off Your Losing Trades 231 Rule 2: Collect Enough Premium 234 Rule 3: Sell Far Enough Away from Market Price 240 Rule 4: Use Underlying Instruments that Revert to the Mean 242 Rule 5: Sell Options with Proper Duration until Expiration 244 Rule 6: Perform Additional Analysis in Order to Get a Feel for Market Direction 246 Rule 7: Attempt to Make Your Market 255 Conclusion 256 Glossary 259 Index 263 Foreword B inary options are a relatively new and unique way to take part in the financial markets Over the past decade they have become popular instruments in Europe and Asia, and more recently, over the past few years, have not only gained acceptance, but have seen widespread growth in the United States, particularly within the retail trading community One may ask, “Why, with all of the investment vehicles available, stocks, futures, forex, options, exchange‐traded funds, and so on, would I want to take a look at another contract type?” This is a legitimate question One of the main reasons traders may look to a contract like a binary option is risk control Any seasoned trader in any market knows that profitability on any given trade is secondary, but risk management on every trade is mandatory and of the utmost concern This is particularly true when participating in leveraged markets such as futures and currencies, where one mistake can not only result in large losses, but in some cases, losses that exceed the amount of capital in the trader’s account This can create an ugly scenario for any trader—the dreaded margin call If you’re not familiar with this concept, just think of the reaction of Randolph and Mortimer Duke at the end of the movie Trading Places and you may have a good idea of the devastating effect a margin call can have In the case of a binary option, whether I am buying or selling, my risk is always limited and 100 percent defined up front, before the order is submitted What this means is that a trader can very closely manage the risk on every trade No matter what happens in the world while the trade is on—geopolitical tensions, central bank announcements, natural disasters, whatever the case—the investor cannot lose more than is put up for the trade No worries of margin calls or being margined out, and more importantly, no chance of your broker calling you up and telling you that you have to deposit more funds—funds that you may not have Another reason to consider binary options is simply cost Many of you reading this may have wanted to speculate in the financial markets You may have been standing at the gas pump and thought, “I knew oil was going up.” Or perhaps you were reading the newspaper, saw something that caught your eye, and said, “I think stocks are going up tomorrow.” Unfortunately for many, the cost of placing a trade in the traditional markets may xi 253 1.16% percentage: percentage: 2.50% 22 2.84% 22 1.94% 1.16% 5.41% 14 5.12% 45 5.81% 45 162.50% 13 1.94% 10.42% 27 7.74% 68 8.77% 68 7.36% 19 3.88% 10 15.06% 39 14.45% 127 16.39% 127 15.89% 41 10.85% 28 22.39% 58 15.70% 138 17.29% 134 19.77% 51 10.08% 26 22.01% 57 7.39% 65 8.39% 65 9.30% 24 4.26% 11 11.58% 30 4.10% 36 4.65% 36 5.04% 13 1.55% 7.34% 19 2.05% 18 2.32% 18 1.16% 0.78% 5.02% 13 1.25% 11 1.42% 11 0.78% 0.39% 3.09% –3% –2% 2% 3% 4% 5% 6+% changes changes changes changes changes changes changes Note: Calculated only for five‐day and four‐day weeks Open intervals (i.e., 3% changes = 3+%) 15 1.71% Grand Total: # of weeks: 1/7/1997– 1/9/2012 15 1/7/2002– # of weeks: 1/7/1997 1.94% 0.78% percentage: percentage: 1/8/2007– # of weeks: 1/8/2002 # of weeks: 3.86% percentage: Total: 10 1/9/2012– # of weeks: 1/9/2007 –6+% –5% –4% changes changes changes EXHIBIT 16.20 Daily S&P 500 Futures, Five‐Year Intervals 254 BINARY OPTIONS "T BO FYBNQMF
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KVTUBCPVUBOZPOFDBOEJWFSJHIUJOBOEFOKPZUIFFYDJUJOHSJEF The Volatility Short Trading Rules 257 KEY POINTS: PART To take a quiz on this section, simply visit our companion education site, www.traderschoiceoptions.net t Premium collection is a method of trading in which you bet on an underlying instrument staying within a certain range This strategy is based on the idea of normal distribution, which suggests that an instrument is most likely to be at the same price at the beginning and end of a time interval t Binary options make this strategy more effective by limiting the potential losses t In order to manage risk, it is best to cut any losses at a certain percentage of potential gains t It is also essential to ensure that the range that you speculate the instrument will stay within is wide enough that you collect enough premium to cover commissions, bid‐ask spreads, and risk of losses t The distance that your strike prices should be from the market price is a function of many things, including your cutoff parameters, market volatility, and option premiums t When using premium collection strategies, it is best to speculate on underlying instruments that have a tendency to hold toward a mean price rather than trend t It is best to use binary options with less duration in volatility short trading, as this minimizes exposure to extreme movements in the market t When using volatility short trading systems, it is in your interest to extra research to get an idea of where it is going/where it is not going in order to increase profitability t You can use basic technical analysis (identifying trends, resistance or support levels, patterns, etc.) to adjust your volatility short spreads and increase returns t Contrarian analysis (betting on the market reversing a recent trend) can also be used to adjust volatility short spreads and boost returns t Staggering into trades involves entering each leg in your volatility short spread separately (and possibly even with multiple trades per leg) over the first few days of a week This conservative approach decreases risk by making your trade more fluid with the market but can also reduce your returns t A final way to increase profitability on volatility short spreads is to use limit orders to attempt to buy in‐the‐money at a price lower than the ask and sell out‐of‐the‐money at a price higher than the bid Binary Options: Strategies for Directional and Volatility Trading Alex Nekritin © 2013 Alex Nekritin Published 2013 by John Wiley & Sons, Inc Glossary At‐the‐Money The strike price of an option contract and the price of the underlying asset on which the option is based are at the same level Bid The current price to sell an option Binary Option Also known as digital options or all‐or‐nothing options They are a type of options derivative Binary options can be considered a yes‐or‐no proposition—either the event happens or it does not Buying Volatility Speculation that the underlying asset will make a large move without necessarily picking direction Call A call option gives the owner the right to purchase the underlying instrument at a particular price (known as the strike price) any time before expiration Ceiling Also known as the maximum gain, or the most you can profit on a binary option trade Collateral The amount of money a trader will need to provide in order to trade a binary option If the trader’s assumption is correct, the trader will be given back the collateral plus profit Commission Fees charged by a broker or exchange to trade Commodity Physical goods, such as oil, corn, or gold Commodity Future Futures contracts that can be used to speculate or hedge on various physical commodities Contract A trading unit for a derivative instrument Binary options are traded in contracts Currency Pair Currencies are always quoted in pairs, such as GBP/USD or USD/ JPY The reason they are quoted in pairs is that in every foreign exchange transaction, you are simultaneously buying one currency and selling another Daily Expiration Contracts that expire at the end of the trading day Daily binary options expire each day at 4:15 P.M EST Directional Trading Speculating on whether an underlying market will go up or down Economic Event A report released by a government agency that depicts a specific part of the economy Expiration The point at which a contract is no longer tradable 259 260 GLOSSARY Floor Also known as the maximum risk, or the most you can lose on a binary option trade Futures A contract that says that the buyer or seller will purchase or sell a specific asset for a specific price at a specific time in the future Hedging Using options, futures, or binary options to protect the value of a corresponding asset class that is either owned or currently being traded Historic Volatility The actual volatility of a financial instrument over a given period of time Implied Volatility The estimated volatility of a security’s price In general, implied volatility increases when the market is bearish and decreases when the market is bullish In‐the‐Money In‐the‐money means that an option contract is worth money If a trader buys a binary option and the underlying asset is above the strike price of the binary, the binary is in‐the‐money If a trader sells a binary option and the underlying asset is below the strike price of the binary, the binary is in-the-money Intraday Contracts that expire throughout the day With intraday binary options you can choose from binaries that expire at 11 A.M., 12 P.M., P.M., and 4:15 P.M EST These options expire within a trading day Leg An options term that refers to one side of a spread transaction For instance, a trader might buy a call option that has a particular strike price and expiration date, then combine it with a put option that has the same strike price and a different expiration date The two options are called legs of the spread Limit Order A type of pending order Long Position Buying a particular asset class With binary options trading, taking a long position means speculating that an underlying asset will settle above the binary option’s strike price Long Volatility A binary option strategy that consists of buying a binary option with a strike price above an underlying asset’s market price and also selling a binary option with a strike price below the underlying asset’s market price Long volatility strategies are used when an assumption is made that an underlying asset will move in one direction or another Margin Funds that are required to trade vanilla options and futures Typically, the amount of margin required is a small percentage of the overall contract cost When trading on margin, a trader is using a small amount of money to control a larger amount of an asset class Maximum Loss The most money that can be lost on a binary option trade Maximum Profit The most money that can be made on a binary option trade Natural Market Consensus The general consensus of all market participants currently trading in a particular asset class Offer The current price to buy an option Also known as the “ask” price Option Chain A list of the available option strike prices on a particular underlying asset Glossary 261 Option Delta A parameter of the option that depicts its sensitivity to the price movement of the underlying market on which the option is based Option Spread An option strategy that involves buying and selling multiple options Out-of-the-Money Out‐of‐the‐money means that an option contract is not worth money If a trader buys a binary option and the underlying asset is below the strike price, the binary is out‐of‐the‐money If a trader sells a binary option and the underlying asset is above the strike price, the binary is out‐of‐the‐money Price Quote How the value of an asset class is displayed The bid and offer are shown side by side in a binary option quote Example: 30 bid/33 offer Put A put option gives the owner the right to sell the underlying instrument at an agreed-upon price (the option’s strike price) any time before expiration Selling Volatility Speculating that the underlying asset will remain in a certain range by expiration Settlement Fee Fees charged by a broker if a binary option is held until expiration Settlement Value The price of a binary option contract at expiration Short Position Selling a particular asset class With binary options trading, taking a short position means speculating that an underlying asset will settle below the binary option’s strike price Short Volatility An option strategy that consists of selling a binary option with a strike price above an underlying asset’s market price and also buying a binary option with a strike price below the underlying asset’s market price Short volatility strategies are used when an assumption is made that an underlying asset will stay within a range Speculation Attempting to profit from forecasting the movements of an asset Spot Forex The abbreviation for the foreign exchange, or currency, market The forex market is considered a spot market A spot market is any market that deals in the current price of a financial instrument Retail spot forex is traded via forex‐dealing firms and banks Stock Index A basket of stocks that is constructed to reflect and track a particular market or sector Stock Index Future Futures contracts based on a variety of global and domestic stock indexes They can be used to speculate on the price direction of a stock market index or hedge (protect) against a sudden price decrease of a portfolio of stocks Strangle An options strategy involving buying or selling options with different strike prices that will profit if the underlying asset remains in a tight range or moves outside of the range With binary options, to go long strangle, you would sell a strike price lower than the market price, and you would buy a strike price higher than the market price To go short strangle, you would buy the strike price lower than the market price and sell the strike price higher than the market price Strike Price The true or false condition relative to the underlying market More simply put, the strike price is your price target to be achieved or not achieved based on your position (long or short) 262 GLOSSARY Time Decay The relationship of an options price relative to the amount of time until it expires Time Value The amount of time until expiration An option with more time until expiration has a higher chance of being settled in‐the‐money than an option with less time until expiration Traditional (Vanilla) Option Derivative instruments that are exchange traded An option gives the owner the right to buy or sell the underlying instrument at a particular price Options are traded on various instruments such as individual stocks, futures, currencies, and indexes Underlying Asset The asset on which a binary option contract is based Example: US 500 binary option is based on the S&P 500 futures Volatility Trading Speculating on whether the volatility of an underlying market will increase or decrease Volatility trading means that you are not trying to predict a direction in the market You are simply speculating whether the market will stay in a certain range or will come out of the range in either direction Weekly Expiration Contracts that expire each trading week Weekly binary option contracts expire Friday at various times throughout the day, depending on the underlying asset Binary Options: Strategies for Directional and Volatility Trading Alex Nekritin © 2013 Alex Nekritin Published 2013 by John Wiley & Sons, Inc Index Account breakdown, 221 Account distribution, diversification (relationship), 220 Asset classes, binary option availability, 3–10 Assets, news releases (impact), 139e–140e, 149e–150e At-the-money, definition, 259 At-the-money binary option trade data points, 50e, 58e profit and loss (P&L) graph, 49e, 57e At-the-money gold binary option entry breakdown, 96 example, 96–97 exit breakdown, 97 rationale, 96 At-the-money long trade collateral entry breakdown, 49 example, 49 rationale, 49 At-the-money long trade settlement entry breakdown, 63 example, 63–64 exit breakdown, 63 rationale, 63 At-the-money option, purchase (example), 125 At-the-money short collateral entry breakdown, 56 example, 56–58 rationale, 56 At-the-money short settlement entry breakdown, 70 example, 70–71 exit breakdown, 70 rationale, 70 Automated system, trading, 214 Back-testing danger, 161 difficulty, 158 results, example, 216 rules, 162–163 Bid, definition, 259 Bid/offer, 76 Bigger losses strategy, 169–171 Big wins strategy, 171–174 Binary, term (meaning), 19 Binary option chain, 33 collateral level, 52e, 54e contract example, 60e contrarian analysis, 251–252 daily US 500 example, 194e example, 36e, 46e, 89e expiration, time (duration), 34e, futures, 118e reading, 34–38 US 500 binary options, example, 191e US 500 data, 124e, 126e Binary option condition depiction, 36e expiration, relationship, 84e, 87e, 89e, 93e morning sale, 92e purchase, 83e, 89e sale, 86e Binary option contract collateral, 43 exit, 87–94 expiration value, 45e strike price trade, 65 long, collateral requirement, 48, 49 losses, minimization, 87–94 sale, premium collection, 51 trading, 71–72 expiration/settlement, relationship, 95 value behavior, 32e Binary option price behavior, demonstration, 125 market consensus, 32–34 minimum/maximum, 44e time until expiration, relationship, 31e Binary options advantages/disadvantages, 13–14 flowchart example, 7e list, 14e asset class availability, 3–10 asset presence, 12 assumption, availability, 5, 242 behavior, expiration (approach), 123 benefits, 202–206 binary nature, 155 CBOE (Vanilla) put/call options, contrast, 10–13 collateralization, 13, 201 completion, 43 collateral requirement, 13 components, 20–22 consideration, 25 currency pair availability, definition, 1, 259 depiction, expiration (impact), 125e derivative instruments, meaning, 44 drawdown, calculations, 213e percentage terms, 214e example, 204–205 exit strategy, 189–190 expiration, 21–22 approach, 125 behavior, 13 price, behavior, 14 probability, 35 timing, 124–125 values, 44–45 263 264 Binary options (continued) fixed risk and reward, 12 fundamental trading strategies, 139 going long, profit and loss, 112, 113e in-the-money consideration, 24 intuitive pricing, 14 jump, 92 long, P&L graph, 37e long strangle, profit and loss (P&L) graph, 201e long trades, settlement, 59–71 order types, 78e payout odds, 36e at-the-money level, 37e in-the-money level, 38e out-of-the-money example, 37e payouts at expiration, 202–203 position, collateralization See Long binary options position pricing, 29 profit, 66 purchase, 135 example, 203 puts/calls, absence, 13, 95 quotes, reading, 75–76 retail trader action, 246–247 risk, limitation, 14 sale, 244–246 example, 203 short trade formula, 65 mechanics, 50–58 settlement, 63–67 small contract size, 14 spread, risk management, 190–199 strangle, profit and loss (P&L) graph, 200e strategies back-testing, 158–161 creation, 153 strike price, 20–21 effect, 33e expiration, instrument (impact), 51e instrument, impact, 52e systems, usage, 155 technical trading strategies, 129 INDEX time value, 30–32 representation, 31e time until expiration, 193e traditional options, contrast, 12–13 usage, 107 value, 44 volatility trading, 15 Binary option trades, See also Economic events collateral table, 121e data points, 188e, 189e entry, 75 breakdown, 82–83 exit, 75, 78–81 breakdown, 83, 85 commissions, 78–79 profit, locking in, 82–85 expiration example, 204 exit, 79 exit timing, 81–94 losing, 79–80 winning, 80–81 long position, 82 entry breakdown, 82–83, 88 example, 88–91 exit breakdown, 83, 90 maximum loss/profit, 121e settlement, commissions, 78–79 short position, 85 entry breakdown, 85 exit breakdown, 86–87 Binary option trading, 31 advantage, 13 collateralization, 44 expiration, trading correctness, 95 keys/examples, 95 reasons, 14–15 safety, 200 strike price, impact, 20 Blackjack, edge (example), 156 Breakout binary options, usage, 134–135 chart, 159e strangle trade example, 136–138 rationale, 136 trade entry, 136 trade exit, 136–137 strategy problems, 159–160 usage, 159 trading, 134–138 Buying volatility definition, 259 long strangle, definition, 108 Buy order, depiction, 161, 161e Call, definition, 259 Call options contracts, 10 CCI approach, 220 Ceiling, definition, 259 Chicago Board Options Exchange (CBOE) vanilla put/call options, binary options (contrast), 10–13 Chicago Mercantile Exchange (CME) expiring/exercised vanilla put/call options study, 226 S&P futures data, usage (example), 158 Collateral, 120–121 definition, 259 explanation, 44 level See Binary option chain; Binary option contract requirement, 54 See also Binary options table, 71, 73e Commissions, 71–73 breakdown, 73e definition, 259 requirements, 79e Commodity, definition, 259 Commodity futures, 5–7 definition, 259 pricing, Conditional stop (trade exit tactic), 177 Consecutive losing trades, 215–216 Consecutive trade cutoff, problems, 216 Contracts definition, 259 trade settlement, receiving, 81 value, binary option behavior, 32e Contracts for differences (CFDs), 158 Contrarian analysis, 249–251 265 Index binary option chain, 252e rolling out, 251–252 Copper binary option at-the-money example rationale, 101 Copper binary options at-the-money example, 101 entry/exit breakdowns, 101 chain, 100e in-the-money example, 98–100 entry/exit breakdowns, 100 rationale, 100 long in-the-money binary option trade data points, 102e P&L graph, 101e short at-the-money binary option trade data points, 103e P&L graph, 102e short out-of-the-money binary option trade data points, 98e P&L graph, 98e Copper binary options, examples, 99–103 Copper futures, Corn futures, Crude oil futures, Currency pairs binary option availability, definition, 259 quotes, Cutoff ratio, impact, 234 Cutoff strategy, rolling out strategy (combination), 251–252 Daily binary options, 22 Daily expiration, definition, 259 Daily S&P 500 futures, five-year intervals, 245e, 253e Data overoptimization, avoidance, 163 range, back-testing, 163 size, back-testing, 162–163 Debt risk See Vanilla options/ futures Deep-in-the-money option delta, level, 123 entry/exit breakdowns, 170 purchase, example, 169–171 rationale, 169 sale, 226 trade, problem, 170 Deep-out-of-the-money option, sale, 226 Delta binary option chain, examples, 124e, 126e option price, relationship, 127t price, relationship, 127 understanding, 123–127 Directional analysis, 247 Directional option strategy, 246–247 Directional systems, 246 Directional trading, definition, 259 Disaster factor protection, 201 Diversification See Intersystem diversification account distribution, relationship, 220 Dow Futures (Wall Street 30), Downtrend, consequences, 162 Drawdown, 184 See also System analysis, five percent loss (example), 185e analysis, two percent loss (example), 184e approach, maximum consecutive trade approach (combination), 216 calculation, 212 See also Binary options historical/back-tested drawdown, 214–215 trade-by-trade calculation, 214 Drawdown maximum cutoff, presence, 218 factors, 214–215 setting, 218–219 Duration, impact, 244–246 Economic calendar, example, 142e Economic data, position control, 202 Economic data releases, 8–10 position, 200 speculation, 149–150 Economic events, binary option trade, 147–148 rationale, 147 trade entry/exit, 147 definition, 259 short binary option trade data points, 148e P&L graph, 148e Economic releases, impact, 141 Emotions control, 166, 167 impact, 165 justification (process), 166 Eurex Dax futures (Germany 30), EUR/USD binary options, option chain, 204, 204e cross, 161 increase, assumption, 206 movement, chart, 206e pair, trading level (example), 141, 160–161 trading level, example, Event See Price Exchange and option clearinghouses, trading considerations, 12 Expiration, 21–22 definition, 259 discipline, 206–207 time/date, 76 winning, 80–81 Exponential moving averages (EMA), 254 Fear, emotion, 166 danger, 211 impact, 165 Federal funds rate binary option trades, economic data release, speculation, 149 Fees, 71–73 breakdown, 73e Floor, definition, 260 Forecast, example, 141 Forex, 158 FTSE (Liffe FTSE 100 futures), Futures commodity futures, 5–7 contracts, speculation (example), definition, 260 derivatives, 158 explanation, 3–4 margin/debt risk, 43–44 stock index futures, 4–5 trading benefits, 3–4 266 Germany 30 (Eurex Dax futures), Gold binary options chain, 96e examples, 96–98 Gold daily OHLC chart, 129e Gold futures, decline, 180 option chains, 244e trading price, Greed, emotion, 166 danger, 211 impact, 165 Hard dollar stop, usage, 186 Hedging, definition, 260 High volatility, option chain, 243e Historical data, analysis, 243 Historic volatility, definition, 260 Implied volatility, definition, 260 Indicators collinearity, 157 example, 157e on/off indicator, requirement, 158 Intersystem diversification, 220–221 In-the-money, definition, 260 In-the-money binary option purchase, 178–181 decision, example, 161 entry/exit breakdowns, 180 In-the-money long collateral entry breakdown, 46 example, 46–47 rationale, 46 summary, 47 In-the-money long settlement entry breakdown, 60 example, 60–61 exit breakdown, 60 rationale, 60 In-the-money option contract purchase, example, 189–190 In-the-money option purchase, 248 attempt, 255 In-the-money short collateral entry breakdown, 55 example, 55–56 rationale, 55 INDEX In-the-money short settlement entry breakdown, 68 example, 68–70 exit breakdown, 68 rationale, 68 Intraday, definition, 260 Intraday binary options, 21–22 Japan 225 (Nikkei 225 futures), Jobless claims economic binary option trades, report, position (example), Justification (process), 166 Korea 200 (KOSPI 200 futures), KOSPI 200 futures (Korea 200), Leg, definition, 107, 260 Liffe FTSE 100 futures (FTSE), Limit order, definition, 260 Live account, progression, 163 Long at-the-money, 24 binary option, 24e binary option trade data point, 64e, 98e profit and loss (P&L) graph, 64e, 97e Long binary options position, collateralization, 45–46 profit and loss (P&L), vanilla call option (relationship), 124e Long binary options trade data points, 47e, 85e, 90e, 181e early exit, data points, 91e example, 82–85, 88–91 exit breakdown, 90 expiration payout, P&L graph, 80e profit & loss (P&L) graph, 47e, 180e Long call, profit and loss (P&L) graph, 11e Long in-the-money, 22 Long in-the-money binary option, 23e payout, 80e Long in-the-money binary option trade data points, 61e, 171e profit and long (P&L) graph, 61e, 170e Long leg entry, 248–249 potential breach, cutoff, 233 Long out-of-the-money, 22 binary option, 23e data points, 63e trade, profit and loss (P&L) graph, 62e, 178e Long position definition, 260 profit and loss, graphical representation, 118e, 230e, 236e Long put, profit and loss (P&L) graph, 12e Long strangle (buying volatility), definition, 108 Long trade collateralization, 45–49 logic, short volatility, 114 making, 45 Long trading, 22–24 Long vanilla put trade, profit and loss, 11 Long volatility binary option trade data points, 111e, 137e–138e, 143e–144e P&L graphs, 109e, 110e, 112e, 113e, 137e, 143e definition, 260 entry breakdown, 108–109 example, 108–110 exit breakdown, 109 rationale, 108 trade, profit and loss (P&L) graph, 174e, 227e Losses consecutive losses, 184 minimization, 87–94, 169–175 strategy See Bigger losses strategy Lower strike price breach, short volatility, 115 Low volatility, option chain, 243e Manual system, trading, 214 Margin See Vanilla options/ futures definition, 260 Market direction, 247 establishment, 250 267 Index edge, discovery, 155–156 making, 255–256 movement, 111 presidential election, impact, 144 price, sales, 240–242 trend, determination, 252 volatility, control, 199–202 Maximum dollar loss, determination, 186–187 Maximum drawdown cutoff example, 219e presence, 218 Maximum loss, 120–121 definition, 260 formula, 65 Maximum profit, 120–121 definition, 260 summary table, 71, 73e Maximum risk/reward, short volatility, 115 Mean, reversion, 242–244 Momentum, indicator, 157 Moving average convergence/ divergence (MACD), problems, 163 Moving averages problems, 163 upward movement, 249e Multisystem trading graph, 220e NASDAQ futures (US Tech 100), Natural gas futures, Natural market consensus, definition, 260 Negative emotions, 165 control-168, 166 mitigation, 175–181 reduction, 168 News releases, 139–144 impact, 139e–140e, 149e–150e speculation, 147–148 strangle, example, 141–144 Nikkei 225 futures (Japan 225), Nonfarm payrolls binary options trades, economic data release, speculation, 149 Offer, definition, 260 Option chains daily US 500 example, 194e definition, 260 example, 21e, 30e maximum profit/loss, 68e US 500 binary option, example, 191e Options contracts bid and ask price, change, 33 function, explanation, 10–11 delta, definition, 261 expiration date exercise, 11 in-the-money settling, 194 price, delta (relationship), 127t sale, 244–246 spread, 107 definition, 261 risk management, 190–199 time value representation, 31e time until expiration, 193e types, 10 Order ticket asking price, 77 contract information, 76 details, 77 example, 77e reading, 76–78 stop order, placement, 78 types, 78e Out-of-the-money, definition, 261 Out-of-the-money binary options sale, 226 trade data points, 48e, 207e entry/exit breakdown, 178 profit & loss (P&L) graph, 48e Out-of-the-money gold binary option entry breakdown, 97 example, 97–98 exit breakdown, 97–98 rationale, 97 Out-of-the-money long binary option trade data points, 173e entry/exit breakdown, 172 examination, 171 profit and loss (P&L) graph, 172e rationale, 172 risk, reduction, 173 Out-of-the-money long collateral entry breakdown, 47 example, 47–48 rationale, 47 Out-of-the-money long settlement entry breakdown, 62 example, 62 exit breakdown, 62 rationale, 62 Out-of-the-money option, delta level, 123 Out-of-the-money short collateral entry breakdown, 53 example, 53–55 rationale, 53 Out-of-the-money short settlement entry breakdown, 67 example, 67–68 exit breakdown, 68 rationale, 67 Out-of-the-money 1260 binary options, 205–206 trade, data points, 205e Overbought/oversold, indicator, 157 Payout move, size (impact), 111e regulation, strike prices (usage), 110–113, 116–120 Payout odds at-the-money level, 37e basis, 35 in-the-money level, 38e out-of-the-money level, 37e probabilities, 36e Physical gold, price (speculation example), Political events, 144–146 Political instability, volatility short trade, 144–146 rationale, 144 short volatility binary option trade data points, 146e P&L graph, 145e trade entry, 145 trade exit, 145 Position size calculation, example, 187 determination, 185–190 volatility long trades, 190–195 268 Political instability (continued) volatility short trades, 195–199 maximum dollar loss, determination, 186–187 trade, example, 187–188 trading, data points, 204e trading psychology, relationship, 199 usage, 203 Premium availability, 194e Premium collection, 53, 226–231 entry breakdown, 227–228 exit breakdown, 228–229 lower strike price breach, 228 maximum risk, 228 upper strike price breach, 228 maximum reward, 228 normal distribution curve, 226e option chains, high/low volatility, 235e option graphical representation, 236e rationale, 227 reward risk ratio, 229 short volatility binary option trade, profit and loss (P&L) graph, 229e strategy, 225 total collateral, 228 trade example, 227–231 long trade logic, 228 short trade logic, 228 transaction costs, 237e President, election (market movement), 144 Price See Strike prices behavior, 32–33 event market participant view, 33e occurrence, expiration event, 32 market consensus, 32–34 movement, speculation, 43 quote, definition, 261 Proactive system improvement, 211 Profits improvement, 169–175 reinvestment, 217–218 INDEX target, 219 volatility, usage, 223 Put, definition, 261 Put/call options, 125 Put option contracts, 10–11 Quotes See Binary options bid/offer, 76 expiration time/date, 76 strike price, 75 underlying asset/market, 75 Range regulation, strike prices (usage), 116–120 Reinvestment rule, 216–219 examples, 217–219 Resistance, 160e analysis, 247–249 support, relationship, 130–134 Return on investment (ROI), increase, 159 Reward/risk ratio approach, 169 minimum, determination, 239 short volatility, 115 Risk amount, determination, 186 Risk management, 183 calculator, availability, 187 impact, 156 process, 184–185 Rolling out, 251–252 strategy, cutoff strategy (combination), 251–252 Russell 2000 Futures (US Smallcap 2000), Selling volatility definition, 261 short strangle, 113–116 definition, 108 Settlements, 59 fee, definition, 261 value, definition, 261 Short at-the-money, 27 binary option, 26e binary option trade data points, 72e profit and loss (P&L), 72e Short binary options settlement, 63–64 Short binary options trade See Economic events assumptions, 188 collateralization, 49–50 maximum loss, 53 data points, 67e, 179e, 1983 early exit, data points losses, cutting, 94e profits, locking in, 88e examples, 85–87, 188–189 expiration payout, P&L graph, 81e profit and loss (P&L) graph, 66e, 179e settlement, understanding, 64 short position, 91–94 Short binary options trading position entry breakdown, 91 example, 91–94 exit breakdown, 92–93 Short collateral, examples, 53 Short in-the-money, 24–25 binary option, 25e payout, 80e binary option trade data points, 57t, 71e profit and loss (P&L) graph, 56e, 70e Short leg potential breach, cutoff, 233–234 Short out-of-the-money, 25 Short out-of-the-money binary option, 26e trade data points, 55e, 69e profit and loss (P&L) graph, 54e, 69e Short position definition, 261 profit and loss graphical representation, 118e, 230e, 236e representation, 65 Short strangle (selling volatility), definition, 108 Short trades collateral, formula, 53 logic, short volatility, 114 maximum loss/profit, 65e Short trading, 24–27 Short volatility definition, 261 entry breakdown, 114 example, 113–116 exit breakdown, 115 ... Keys to Trading Binary Options and More Examples 95 Gold Binary Examples 96 Copper Binary Examples 99 PART IV Binary Options Trading Strategies CHAPTER Volatility Trading Explained Taking a Volatility. .. trading binary options PART 4: BINARY OPTION TRADING STRATEGIES Here, you will learn some directional and volatility trading strategies with binary options using both technical and fundamental... advice and strategies needed to prosper today and well into the future For a list of available titles, visit our Web site at www.WileyFinance.com Binary Options Strategies for Directional and Volatility
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