Hello, I am wondering the following: 1. Are there ever any situations where: A. Binary options can have better risk reward ratios then vanilla options. B. Genuine OTC exotic options such as barriers, Knockouts, compounds can offer better deals then vanilla options. 2. What would be some good trading strategies for barrier options? 3. How can exotic options be used for trend following? Thanks
Very general question. I believe you are talking about FX? 1.B) No, unless you are running million dollar portfolio and can strike a deal with Investment Bank to offer you a cheap Exotic. For retail, if you try any of these, you chop your limb first (paying the margin to the bank's who sell to you) before even making any profit. Unless you have really strong edge, in which case you might as well manage your view by using vanilla/underlying. 3. Accumulator or Knock-Out Accumulator.
Lookbacks or knock-outs. Knock-outs are euro vanillas with an american barrier. A "down and out" call would have a knock-out barrier under the strike, for example: XYZ at 100. XYZ 105 call; 95 KO The 95 barrier reduces the prem on what is otherwise a vanilla call. There are reverse KOs as well, among others. Lookbacks return the highest(lowest) print in spot over the life of the option. Floating or fixed strike. Not nearly as common as KOs.
But where to trade exotic options that are not completely f****d ? I have a knack for path-dependent goodies, but where to trade them ? Saxo has only One Touch/No Touch, but without conditional cover (e.g. "cover this if underlying touches X"), Binary.com has also the same problem (even worse, you wouldn't even be able to sell them after some time passes, like 30% of time, even if they have a very solid value). I want One Touch/No Touch, Either Touch/Range, Double Touch and ESPECIALLY No Double Touch (pay out if NOT both targets are touched), even some Reverse KnockIn to couple with vanillas. But I want... custom strikes, expiries and payouts, all these goodies, Bid/Ask pricing instead of that % return crap, unrestricted cover all the way to ...99% of the lifetime, conditional cover to automate strategies... Does anyone know, is it possible to get access to SDeX ?
The bid/offer is implied by the %return on the pair (touch/NT, digital C/P, etc). Say the market is 43/100 in the touch and 74/100 in the NT. 117/100 payout to hit both offers. There is your negative edge. I think you can work-out the rest, right?
You are correct in regards to Binary.com (I was speaking about the others). However one should see live quotes on the Portfolio page, and be saved from the hassle of reloading the page, don't you agree ? There are two problems with Binary.com: 1) the lack of Double Touch/No Double Touch; 2) the lack of the dynamic hedging. One would be enough to solve the situation, but not two of them. Like the Titanic, couldn't stay afloat with 5 full tanks. I would glady throw away automation - as I tried to implement it myself, and I was partially successful - the thing is, Binary.com doesn't play by the rules. If I buy the option now, with expiry tomorrow night, then after today, the option becomes simply unsellable. It has value, yet they say it's "indicative". This is horrible breach of the rules. I must have the right to sell the option back to them. For a correct trading, I must have the right to sell the option back, at a price formed by the sell side that created it in the first place. Look at the option in the pic to the right, there are more than 12 hours to expiry, option has a big fat value of 46%, yet it's stuck in my portfolio! Would you see something like this if you'd trade in a SEF with several banks quoting at the same time ?
My conclusion is, that in the single sell side model, that will always circumvent the rules and twist the instruments to the maximum extent. The only way to trade exotics in a fair, profitable way, would be to benefit real market conditions. And the cartel pricing of a SEF is certainly better to the monopoly of the "binary broker" that puts whatever price it wants.
It's really not a conspiracy. You can calculate the spread easily, provided the dealer is quoting both. It IS a two-way market. Nobody is forcing you to trade there. They take significant risks in trading American exotics that do not exist in exchange-trade vanillas.