binary options

Discussion in 'Options' started by stilldon'tknow, Jun 17, 2011.

  1. I'm thinking about trading binary options, but I haven't been able to find any real info on the subject. Does anyone trade binaries? What are the specifics of entering and exiting trades? I trade regular options using the technicals but binaries seem to be a little bit more challenging. Can anyone help?:mad:
  2. What attracts you to binaries except perhaps novelty?
  3. I see a lot of people developing interest in them and some of the binary option brokers, such as Banc De Binary, anyoption and eztrader offer some very lucrative payouts. If it's that easy, I wanna try my hand at it.
  4. Binaries have not been on my radar. I will enjoy following this thread. Thanks for starting it.
  5. Lucias


    I trade binaries at NADEX. However, without a strong edge you are unlikely to make any money on them.. See my thread in the journals. I prefer the spreads over binaries. Over a few weeks, I had a 50% return on model account and 120% on capital but I've given most of that back due to recent abnormal market conditions.

    Each binary is worth $100 total. It is an all or nothing payout based on if price closes above or below. The pricing is based on some sort of model: probably binomial or black scholes. It is a mathematical thing. What you pay for the binary is based on where the market is.

    If the binary is > 1300 and the market is at 1300 then the fair binary price fair price would be 50/50 plus some small bias for the trend and spread. Unfortunately, i don't have the ability to compute the fair value for binaries outside the market.I'm looking for some binomial spreadsheet for that or software -- anyone? At any rate, it doesn't matter because they quote what they give you.

    The good thing is that it easy to calculate the edge you give up. They typically trade about $10 apart.

    So you'd typically pay $55 instead of $50 (and only get $45 to get out) if the market were at 1300 (fair value probably would be $51-$52). But you also give up another $2 for commission for $12 total.

    This means you must win more then 62% of the time break even. Most technical analysis methods only win 52%-55% of the time. You can see the binaries aren't good. I looked at a few other binary models and they take even more of your edge.

    However, there are ways to trade binaries more successfully and they can be useful at certain times. In general

    Prefer binaries when a trading strategy has

    * A high win ratio but suffers from larger losses
    * One is certain of direction but volatility is down. Many trading strategies suffer when the volatility drops too much. The binaries fix this problem to a large degree -- allowing for consistent profits even in low volatility markets
    * Pick up binaries on price extremes to get leverage. Binaries respond very rapidly to dramatic price change whereas spreads dont. This makes them ideally suited to use when catching bottoms or shorting tops. They dont 'track the market though'.
    * Hold binaries until expiration unless you are sure you are wrong. Don't take unnecessary losses but remember you give up an additional 10% in edge if you sell them out. I've sold them out when I would lose 100% but I would hold them until expiration unless I was 95% sure I was wrong.

    In general the optimal binary trader will pick up binaries on price extremes and typically hold them until expiration. He will use strategies with very high win ratios. This is difficult to do in practice but it is a very interesting product to trade.

    I have often used binaries to hedge my spreads. This is rather risky though and something I'm trying to get away from except to a limited degree. It allows you to create risk/profit profiles where you break even most of the time or lose a ton rarely.

    One thing that makes binaries rather "exciting" to trade is that let's say you buy 2 binaries at $50 and you are right, well you've $100 at risk but because you are right the market for them is now $95, you now you have $19 at risk. If the market were to close below the strike (and you were long) you'd lose the entire $190. However, if you sell out early you give up a huge amount of edge. This makes for very stressful trading when trying to trade optimally.

    You can pickup binaries for say $15 -- pick up 10 for $150 and you could make $850. But lets say they increase in value to around $50. Now it is a 50/50 bet. Do you want to hold and risk losing the $150 + $350? Difficult game. But remember also you will also pay more in commissions.

    In general, i feel the spreads offer the better value. I have strategies that do perform rather strong with the binaries though. So, it is possible. You just have to realize you are giving up a lot of edge and trade accordingly.

    You can also try some other strategies, example market is 1300 and trending. You believe the market will hold above support at 1290. You could buy that binary (> 1290 ) and risk say 70 to make 30 (just an example). Mathematically you will win 70% of time and lose 30%. I've made this play before: it is similar to selling puts below the market. It is limited though by the low leverage potential and high tail risk.

    Probably the best case for a binary is for fading. Often I can predict trades that I wouldnt try with spreads or futures because they have too much tail risk, i.e shorting a new high even though I'm right a lot. That's probably the best case for them. Today would have been excellent, market was at 1274 and I was pretty sure it would fall. yet, the risk was high if I were wrong and the profit is not so much.In futures you learn to stay out of market in times like these.. But that's a good setup for a binary option.

    I typically stick with spreads because I give up less edge (typically 1 ES tick on either side or I might be willing to pay a point or so for protection). In general it is best to pay as little as possible in premium because most edges are rather small. So, you want to keep the premium down. In general, the market pays you to take more risk.

    CBOE also has weekly binaries. NADEX has daily binaries and weeklies. So, I'd like to learn more about the CBOE binaries and how they compare.
  6. Lucias


  7. FSU


    I have been trading the binaries on the SPX (BSZ) and the VIX (BVZ) on the CBOE for awhile. I think they offer some great opportunities, especially for condor traders as they require less contracts to achieve the same result. I think they have great potential.

    That being said, here are the problems with these binaries. First, many brokerage houses don't allow you to trade them. Thinkorswim did, but recently stopped as they had problems calculating margins. I know Fidelity doesn't offer them as well. Open interest has dropped dramatically over the last couple of months. The quoted market is usually .10 wide with the inside market about .06 wide. So if a binary is quoted at .30-.40, the real market is probably about .32-.38. This is the equivalent of a quote of 3.20-3.80 on a corresponding vertical, where that vertical will probably be quoted much tighter, so you will be giving up a lot of edge putting the binary on.
  8. zdreg


    interested in a little game of 3 monte?
    after a few hours u can bet your watch.
    after that u have to show a picture of your wife and daughter before the dealer makes a decision whether to continue the game.
  9. Is it interesting to pay $100 being able to earn a maximum amount of $85 ? There something I don't get.
    #10     Jun 19, 2011