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NADEX Binary Option Strategy

In The Money Binary Option Strategy For NADEX Traders

As I was sitting here one day studying NADEX and pondering several ideas for trading I made a realization. It seems silly now thinking about it, I feel as though I should have noticed this trade sooner. Due to the nature of NADEX binary options and them having different strike prices it is possible to buy or sell options that are already in-the-money (or out-of-the-money for short positions). Think about it, buying a binary options that is already in-the-money. That means you are buying profit. Instant returns, all you have to do is wait for expiration.

In most instances in-the-money NADEX options don’t have much profit margin left. They are exchange traded binary options so when the market thinks an option is going to close in or out-of-the-money its traded value usually goes to $100 or $0 (or close enough to not matter). This should make sense; the options are binary and are only worth $0 or $100 at expiration so when an option is in or out of the money it should be worth $0 or $100. However, due to market conditions there are times when deep in-the-money options can be bought at a discount and provide near instantaneous profits. Similarly, there are also times when deep out-of-the-money options can be sold for the same near instant return.

Nadex 0-100 options have more options.

Nadex 0-100 options have more options.

What Are NADEX Binary Options?

I want to back up here for a step to make sure we’re all on the same page. What is a binary option and what is a NADEX binary option. A binary option is an option that has only two possible values at expiration, all or nothing. In the case of European style binary options this usually means a fixed return in the range of 70-80%  for profitable trades and a return of 0-15% in the case of losing trades.European and other off-shore binary options are not tradable and can not be sold prior to expiration.

NADEX options are tradable, unlike European style options, and have prices that fluctuate between $0 and $100 depending on the price of the underlying. At expiration the options are binary in nature, worth $0 for losers and $100 for winners. The price of the option is between $0 and $100 and changes with the price of the underlying asset. Typically, when an the price of an underlying asset rises above the strike price of the corresponding NADEX option the price of that option will go to $100 or close enough to not make a difference.

  • Click Here – For more on NADEX binary options and the differences between trading NADEX and European style binary options.

The Realization

What I realized is that there are times when you can sell options with an instant, or nearly instant return.  What I mean is that is sometimes possible to buy a NADEX binary option when the underlying asset is above the strike price at a price low enough to allow for an attractive profit. The same is true for short NADEX positions. It is possible from time to time to sell an option at a price that allows for some “guaranteed” profit.  In practice this is actually two different trading strategies; the Bull In-The-Money NADEX Strategy and the Bear Out-Of-The-Money NADEX Strategy. In this article I will outline the basics of each technique and then go into more detail in later posts.

  • Buying a NADEX binary option that is in the money means that it is already above/higher than the strike price. The option does not have to move in order to be profitable, it already is. An added bonus is the protection you gain from buying in the money options. The underlying asset actually has room to move counter to your trade before it reaches the break even point, much less creates a loss.

The Bull In The Money NADEX Strategy

The In-the-money NADEX strategy is a lower risk, conservative strategy aimed at bringing consistent returns. This strategy works particularly well with support/resistance lines, trend lines, Fibonacci Retracements and any other point of support you may find in a bull market. This can also be used to trade the bottom of trading ranges and bounces/bottoms in bear markets. The point is to try and find an asset that is trading near a likely area of support or price level that your analysis tells you the asset is not going to move below. This can be in any time frame, long or short. The very best support lines are ones that are confirmed in more than one time frame and with more than one indicator.

The next step is to scour the available options on the NADEX platform. Look at strikes that are below the current price of the asset and below your identified level of support. I like to stick with the closest expiration available but sometimes move out to the next available which gives a range of 1-5 hours till expiry. For the most part you will find options with values at or near $100 but there may be one with a price of $90 or less. These are the options I like to target.

At face value the risk/reward ratio is on the low side. You are looking at making 11-17%. For most binary options traders this is way to low. It’s lower than the 80% return you get with European style options and it’s lower than the return you would expect to get trading a more aggressive NADEX strategy. The point of this strategy is that the 11-17% return you can expect with this strategy is almost free money. It’s money left on the table by other traders and all you have to do is pick it up. The Bull In-The-Money Strategy is a conservative, low risk strategy with consistent returns comparable to combination strategies found in equity options trading.

How To Use Bull The In The Money NADEX Strategy

  • The first step is to identify a potential area of support. I like to use trend lines, 30 and 150 day EMA’s, Fibonacci Retracement, stochastic and MACD histogram for my technical analysis. I also like to use a 3 time frame approach. First I analyze the long term trends and areas of support/resistance on charts of weekly prices. I draw these lines all in one color for easy reference. The long term trend is not as important as the near trend in this strategy, it’s the areas of support and resistance we are looking for here.
  • Next I move down to charts of daily prices. If any of my lines drawn on the weekly charts are present here they are my most likely areas of support. I also look at the daily price action to see if any shorter term areas of support are present and then draw those lines in a different color. This chart is where trend is most important. If the near term trend is up then you can continue with the bull strategy and play off of support. If the trend is down then you will need to switch to the bear strategy and make your trade based on resistance.
  • To take a signal move down to charts of hourly or even 30 minute bars. Wait for price to move down to your closest support line. Wait for it to find support and begin to bounce. At this time look at the option chains, look at strikes that are in the money, preferably below your closest support line. Strikes should have expiry no later than the end of the current day but shorter is better.  If the option is less than $90 (returns greater than $10 or 11%) then I consider it to be a good trade. It is possible to make returns greater than 20% using this method but on average I am getting in the 10-15% range.
daily chart with support and resistance analysis.

daily chart with support and resistance analysis.

This chart of the EUR/JPY shows long term support, drawn on charts of weekly prices, in blue. Near term support, drawn on this chart of daily prices, is in pink. The long term trend line is up and that is echoed by the 30 day EMA. Because the trend is up in the long and near term I would be looking to buy positions with this strategy. Also, because the pair is closer to the bottom than the top of the range I expect to find more upside bias as well. Now it’s time to move down to the charts of 30 minute bars to look for a trade.
Hourly price chart showing longer term support and resistance

Hourly price chart showing longer term support and resistance

After moving down to a chart of 30 minute closing bars look for short term areas of support and resistance. These are drawn in yellow. On this chart the trend is sideways and range bound but heading up to the upper end of the range. There is additional support at the 132.000 level and the 30 bar EMA around the 132.200 level. Potential trades exists below the yellow support line, the 1.3200 level and below the 30 bar EMA. With this in mind lets take a look at the available options.
In the money 0-100 binary options can still pay a profit.

In the money 0-100 binary options can still pay a profit.

I have already determined that in this case I want to be a buyer of options and not a seller. However, because price is closer to resistance than to support and I am a curious bastard I had to look at possible sell scenarios as well. The best choice, with an expiration about 1.25 hours away, was the 132.51 strike. This is an out of the money strike that would pay $14 if sold. This position comes with a 0.205 spread between the current price and the strike price, giving some cushion and room for movement. It is pretty close to current price and counter to trend so a high risk trade in the end and not one that I am really looking at making now.
Out of the money 0-100 options can still pay a quick profit.

Out of the money 0-100 options can still pay a quick profit.

The best trade scenario in today’s example turns out to be the 132.11 strike. I set my order ticket to a price of $84 but got a fill $0.50 better. This will result in a profit of $16.50 at expiration if the pair remains above the strike price. This trade does not have the same amount of cushion as the bear scenario but comes with the added support of the moving average and the underlying trend (which add risk to the bear scenario). Another thing to note is that this set up has a better pay out than the bear set up. The next shot shows the chart with the chosen strikes prices marked.
This chart shows the strike price relative to support and resistance.

This chart shows the strike price relative to support and resistance.

Looking at the trade this way helps evaluate the risk and reward. The trend following trade has a strike that is below the nearest area of support while the contrarian version is not above the closest area of resistance. Just based on that analysis would make me lean toward the trend following trade. Bear trades are still possible here, just maybe not at this time. Perhaps when prices move toward resistance they will show signs of containment. If this were to happen a bear out-of-the-money position may prove successful.
Buying and selling 0-100 options would have profited in this example.

Buying and selling 0-100 options would have profited in this example.

After drifting sideways over the next hour or so this trade closed in the money and I profited the $16.50. Notice how prices retreated to the 30 bar EMA but were held there. This area of support provided protection for the trade, a barrier if you will, to loss. With the market currently positioned the way it is I would look to the next available expiration to make a similar trade. Because prices seem to be drifting sideways, and because I know that at the time of this writing there are market moving events brewing with the ECB and the BOJ scheduled for later release this may be a potential candidate for a straddle.

The Bear Out-Of-The-Money Strategy

The bear out-of-the-money strategy is just like the bull strategy but in reverse. When the near term trend is down you can play this strategy from resistance. The first two steps are exactly the same. The difference is which side of the option you are positioning yourself on. For the bear strategy you are selling short positions so you need to target options that are out-of-the-money and above the closest area of resistance.

  • To take a bear signal move down to the charts of hourly or 30 minute bars. Wait for price to move up to resistance and begin to stall or reverse. Look to the option chain for an option with a strike above the current price of the underlying and above the closest resistance line. If I can find one with an expiration of one day or less that sells for more than $10 I consider it a good trade. I tend to get better returns using the bear version of the strategy but that is not always the case.
The Range Bound Out Of The Money Strategy For NADEX Binary Options
Savvy traders can turn this strategy into a double winning straddle or strangle. Some of you may have already noticed that both of my listed examples profited. The in-the-money position closed in the money and out-of-the-money position closed out of the money. This is less likely to happen in a strongly trending market but range bound markets are perfect. The best method, and most profitable, is to “leg” in to the trade. That means enter into one position first, wait for it to appreciate, and then enter into the second position. In practice this means buy the long position when the market is at the low end of the range and sell the short position when the market is at the high end of the range.

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