Tag Archives: expiry

How do you choose the right binary options expiry?

Choosing Binary Options Expiry

This post is a follow up to one I recently wrote about choosing binary options expiry. The previous posting was focused on measuring your charts and logging the information in a table so that you would know the average movement of a chosen asset for a given time frame. If you don’t know what I am talking about I suggest you read that post, there will be a link later. This post ties into that one but focuses more on stronger signals and weaker signals. For example, with a strong signal I may choose an option with expiry towards the short end of the expected time it would take for the option to move into the money. With a weaker signal I may choose to use an expiry at the longer end of the expected time frame.

Statistical Analysis And Your Charts

Example of chart data that can affect expiry choices

Example of chart data that can affect expiry choices

This is what I mean. In the previous article I described a method of measuring the length and magnitude of rallies and declines. These measurements are entered into a table and an average is given. This average can be used to help determine appropriate expiry’s. What I did not hit on the last time were the other important statistical points that can be gleaned from the data. For one, the median. The average and the median are not the same thing, one or both could be skewed. For another are the extremes and that is what this post is about. The extremes tell you what to expect when the unexpected happens. Let’s think about this from the perspective of the trade and signal. There is a sample amount of signals, some extreme and some average. The strong signals will correlate to the short extreme and the weak signals will most likely correlate to the long extreme in terms of the average amount of time it takes for a signal to produce a winning trade.

What constitutes a strong and a weak signal will depend on your trading system. I use a variety of different indicators and can get strong and weak signals in a number of ways. For this example I want to use a trade I made on Communitraders as part of my weekly column, Tips From The Geek. The trade is on gold. At the time the tip was made I was getting bearish signals but they were weak. I couldn’t discount them, and since the longer term trend was down I wasn’t about to risk a bullish trade, so I had to act. I was sure my analysis was right but was unsure of the time frame, a perfect time to look at my tables and see just how long it might take for a weak signal to develop. Based on my data and analysis I chose an expiry of one month.

communitraders order screenIn between the time that I opened the trade and closed it the price of gold fluctuated wildly. Economic data, Quantitative Easing and global recovery were playing havoc with expectations and demand. At one time this trade moved more than $60 out of the money. I had written it off on more than one occasion. Losses are part of the game so I wasn’t too upset. However, I wrote it off too soon. My analysis had been correct. Near term noise had a negative impact on my analysis but the longer term trend held true and it eventually did close in the money.

This chart shows entry and expiry.

This chart shows entry and expiry.

Choosing The Right Expiry Can Make All The Difference

Let’s take a quick look at the charts. At first glance you would think that playing a call may have been better at this time but my analysis was bearish. I was just uncertain of time frame because of the weakness of the signal. Based on my tables I knew I could expect it to take 4 weeks or more for this kind of signal to develop. I choose to use a one month expiry and managed to squeak out a profit. Just a week later the price of gold dropped again, breaking a major support and confirming my long term analysis. I could have trade calls in the interim but with bearish technicals I judged it to be a bad idea. By using my data tables  I was able to pick an expiry appropriate to the signal and was able to make a profitable trade if barely. Trusting your analysis can sometimes be the hardest thing to do, I readily admit being worried this trade was going to lose. Choosing the right expiry can be the difference between a winning trade and a losing one.

Click here for more on how to Measure Your Charts and choosing the right expiry.

Choosing the right binary options expiry can be tough.

How To Choose The Right Binary Options Expiry

Choosing the right expiry, or amount of time until your binary option expires, is perhaps one of the most difficult concepts to master. Too many times have I sat and watched a trade move in the money, and then out of the money, and then in the money, and then out of the money just before expiry only to move back above my strike price after my options expired worthless. This is one of the most frustrating parts of trading and one of the reasons why I don’t watch open trades. I usually keep between 5 and 12 trades open at any one time. My goal is to open 5 new trades per week making small investments with each trade. Sometimes my trades have an expiration of 3 days or less, sometimes a week and sometimes a month or longer. There are three things to try to keep in mind when choosing expiration; what kind of signal was it, what time frame was the chart and what duration to expect for the movement.

This binary trade was in the money several times before expiring out of the money.

This binary trade was in the money several times before expiring out of the money.

Charting Basics

One of the very first things I ever learned to do was to “measure” my charts. I learned to measure each and every rally, in each and every time frame that I use and I have found that this technique is great for social trading binary options as well. Measure each and every bear market, being sure to measure the length of each leg as well. I was also taught to measure the height and lengths of triangle patterns, consolidations and reversals. I taught to do this so that I would know what the average number of legs in a primary bull is. So that I would know how long to expect a bear market in the secondary trend last and so that I would know how far on average a break-out of an ascending triangle would be. This may sound time consuming and maybe even a little confusing but it’s really very easy, especially with computers. Imagine doing all that math without a spreadsheet!

  1. I started with 5 year charts of weekly data- measure the length and height of any bull and bear markets you see. I measure from the highest intra-day high to the lowest intra-day low.  Count the number of legs in each rally and in each bear market, measure each of them. If there are any trading ranges, consolidations or significant patterns present measure them as well. Enter each figure into a table in consecutive order, have the math program perform averages for you so that you know the stats for each category over the long term.
  2. Next I moved down to one year charts of daily prices. I always use candlestick charts because they make it easy to see the markets. I measure all the rallies and bear markets in this time frame as well. I enter all this data into another table I have made for this data. Now I know what the average movements are over the short term.
  3. I also trade near term positions using charts of hourly/30 data depending on the asset. It is up to you to choose which to use. Some assets don’t move as fast as others so they need the hourly in my opinion. Make the same measurements as on the other charts and log them into a table. Now you have the average data over the near term.
  4. Now you have to maintain your data. Each time the market completes a movement you need to update your tables. You will spend the most time updating the near term tables and the least time updating the long term tables.

I know from my own tracking data of asset XYZ that I can expect a long term primary trend to last for 3-5 years. Within that primary trend I can expect 3-5 bull markets with a corresponding number of corrections. Each bull market will last between 6 months and a year or so before correcting with each correction lasting from 1 to 3 months, give or take. When I move down to charts of daily prices I know that short term up trends can last up to a year or more with 3-5 bull markets and corrections along the way. Each of the bull markets  in a short term up trend usually last about 2 months but can vary depending on conditions. Each correction of a short term trend usually lasts for 2-3 weeks but every up-legs there will be a major correction up to 5% or more that will coincide with an expected correction on the long term weekly charts. I think by now you get the idea of just how much information you can get from measuring your charts in this manner. Now, what do you do with the information.

How To Choose Binary Options Expiry

Choosing expiry is much easier when you have in depth knowledge of how far and how fast an assets movement will be. The trick is using the information gleaned from the tables you create to help you pick just the right entry. This is how it works. First identify/quantify the type of signal you are trading on. Is it a signal from a long term weekly chart or from a short term daily chart or from an even shorter term chart like hourly, 30 minute or 60 second. Is the signal a bull signal or a bear signal? Is it the weak first signal or the stronger second signal (most of my techniques will fire a first weak signal and then a stronger second signal)? Once you answer these questions you can move to your tables. Choose the data set that matches the signal you are taking, from there you determine an appropriate expiration.

For example; let’s assume we are trading a buy signal on the daily charts of asset XYZ. The signal is supported by a corresponding signal on the longer term charts so we are fairly certain of the trade.  Indications are for a new up leg in a short term bull market that is part of a longer term bullish movement. Lets also assume that asset XYZ also performs in a similar fashion to what I described above . So, since we are expecting asset XYZ to enter a new leg of a short term bullish up trend, and since we my tables tell me that this type of signal usually results in a two month rally followed by a one month decline I can set my expiration accordingly. I will want to set the expiration far enough out for the asset to rally and move into the money but not too far out. In this case at least a week in order for the market move higher but no more than two months. If I think the signal is strong one week is plenty, if it is a weaker signal one month does better.

  • Long term signal (weekly charts) – In my data long term signals take 2-4 weeks to move into the money and then continue to rally for 6-12 months. In this case I usually choose to trade monthly positions for this asset. You will need to create your own tables in order to predict long term movements for your chosen asset.
  • Short term signal (daily charts) – In my data short term signals take 3-5 days to develop and begin to move. Bear signals are usually much quicker than bull signals. Once the signal begins to move into the money it could keep trending higher for 2 months or more before correcting.
  • Near term signals (hourly charts) – In my data a strong signal on an hourly chart can last for 10-15 days. I only trade near term signals when they correspond to the underlying trend.
My data tables help me choose the right binary options expiry.

My data tables help me choose the right binary options expiry.

The same applies to longer and shorter term charts. Simply follow the guidelines set by your tables. Use the tables along side your trading diary and log books to help  fine tune your system. I use several types of indicators and analysis in my trading so whenever I take a signal I always write down what kind it is so I can go back and see which ones work better than others. This (keeping a log)  is much harder to do when you are trading a lot, especially with 60 second and other super short term expirys. You can still use my method of choosing expiry. When I want to day trade or see a good signal on a one hour chart I have data for that time frame too.

  • Here are some tips on what to measure and track. 1) data for weekly, daily and hourly/30 minute charts  2) what the signal is 3) how long until moves into the money 4) how many rallies, declines in a trend 5) how long until correction/reversal 6) how long are corrections/reversals 7) average each data so that at any given time you know the expected length and duration of any movement in your chosen asset.
  • You may also want to take note of any catalyst that occur alongside your signals. These could include news announcements, earnings, inventory numbers or economic data and many other market moving events.