With the use of Gann and other predictive analysis, many very high profit opportunities exist in binary options.
When traded options of any kind come close to expiry their volatility levels become exceptionally near to expiry if the option is near to its strike price. This is because if the options expires the wrong side of the strike price, its worthless (as with any normal option) but if it expires the other side of the strike price it is 'in the money' so to speak and, unlike a normal option; a binary bet will expire at FULL VALUE for want of being just one tick in the money. This makes binary bets theoretically even more volatile than ordinary traded options close to expiry, and in general potentially more profitable, as a normal traded option frequently has to travel well into the money to redeem its original purchase value before entering into profit.
Each year there are countless opportunities for making exceptional returns from 'out of the money' options. Let us start with the normal traded options for a notably profitable past example before moving onto some specific binary options strategies. This clearly demonstrates the incredible profitable phenomenon of near expiry traded options, whether binary or normal.
A somewhat famous case involving near expiry options occurred in early 1989 on the London Traded Options Market (LTOM). 1988 had been a slow year for the London equity market, seeing essentially sideways action after the shock of the 1987 market crash. The FTSE traded in a fairly narrow range for the years between 1700 and 1885. By early December 1988 most analysts were extremely bearish, as the FTSE was trading around 1750 - near the bottom end of the range. However, the charts were beginning to tell a very different story. Major American and British stocks were all showing huge signs of accumulation and in early January 1989 the market exploded through the top end of the range at 1900.
However, the sentiment on the market was so bearish that 'out of the money' 1950 and 2000 calls were still selling very cheap. One individual, with the power of his conviction, came into the market and bought GBP10,000 of 'out of the money' calls, due to expire worthless at the end of the month of January 1989 should the market not rally above these levels. He cleared GBP3.75 million off the able by the end of January, originating from his GBP10,000 investment as the market closed the month above 2050, bringing his 'out of the money' call options comfortably into the money.
In this case, as the options has gone significantly into the money, and where therefore more profitable than a binary option would have been (even if readily available at the time). This is because the binary option goes to full value as its odds are 'fixed' by being just one point in the money. Whereas the traded option theoretically has unlimited profit potential.
Although the ultimate profit potential of the normal traded-option exceed that of the binary option, where the payout is fixed, the binary option is frequently more profitable as it overcomes the factor of having to go that far into the money to become profitable to overcome the original time decay element of the original options premium. Long term binary bets can be very easily user defined at the Binary.com website.
Let us take a real life example. This is known on the Binary.com website as a Bull/Bear expiry bet. On October 5th 2005, expecting an imminent market fall, I took out a Bear expiry contract on the FTSE index for EUR 166.70. Here is the actual transaction listed below taken from the statement page on the Binary.com webpage for my account:5th-Oct-05 08h27GMT Purchase
The value of the index at the time of the transaction was around 5450. If by October 21st the market was below the STRIKE price of 5220, Binary.com would have to pay me out EUR 5000. If however, the market was trading above 5220; only 230 points above the value of the market at that time then Binary.com would keep my EUR166.70.
The market continued to fall, and on October 19th, just 2 days before the option was due to expire the cash FTSE fell below 5220 for the first time during the bet. As the market fell Binary.com continue to make two way prices on the bet. By the time the market had gone 30 points past the strike price, the bet was worth around EUR 2,900. The bet was jumping around by several hundred euros with just 10 points moves in the market. After all, if the market were to rally by a few points, my EUR 2700+ gain would evaporate instantly. Therefore, I ran a risk of losing the entire stake by holding on. So, with 17 times my money in the bag if I took profit, I decided to close the position. Here is the statement text cut and pasted from my Binary.com account:19-Oct-05 09h04GMT Sale
In just 14 days, I had turned EUR 166.70 into EUR 2,927.30, a 17 1/2 times gain on my original investment. Not bad.
As it happened the FTSE closed on October 21st at 5142.1 - so I could have indeed redeemed my 5000 euros if I had held on!
The story above is 100% true, and such opportunities are a daily occurrence in the world of options. However, for every winner such as this one has to ask oneself how many times there are losers. Unless you can really predict significant moves in the market and, in my opinion using market geometry such as Gann and Elliot Wave theory, it is sometimes possible that it can be very foolish to punt on such trades.
To put the above story in perspective I also took out additional bets on the CAC, Dow Jones and DAX markets at the same time as the FTSE - for a possible redemption of EUR 30,000. In some cases the other bets expired worthless or marginally in profit, as the markets did not fall far enough to bring home the big one. However, due to the exceptional gearing possible with these kinds of bets, I could afford to take five bets and make on only one bet to still be heavily in profit.
This proves the theory of risk reward. In other words, I could get it wrong 17 times before making a loss on this trade. The KEY with this strategy is two-fold:
Also notice that I came out of the bet early. Even though in this case I could have made the full EUR 5000 by waiting the extra two days, my past experience as an options broker and a trader made me take off the table what was offered before it simply disappeared. NEVER expect to take it all, and NEVER regret not taking it all off the table. That is your greed talking. The number of times I have seen option profits of thousands evaporate and expire totally worthless the very next day (both in my own account and others) because the position was not closed when the money was there to be taken is too painful to even think about.
An alternative strategy of course is to take a portion of the profit off the table, at the very least gaining back your initial capital, and then let the rest of the position run. This strategy is common in futures and stock trading and is just as valid in binary betting and options trading.
Remember; always operate from a range of strength. Preserve capital. Only risk a small portion of it per trade and try to engineer multiple profitable opportunities.
Let us use an example of what binarybets.com calls their Wall St Index, but in reality is identical to the Dow 30 Cash Index. A standardized bet called Wall St to finish UP starts trading each evening shortly after the market closed which runs through to the close the following evening. Based on the Dow Jones 30 Index cash price the binary option has a maximum redemption value of 100 and a minimum of zero depending on whether the market closes up or down on the previous close. As the bet or binary option nears expiry it can become extremely volatile if the market is trading near to the close in the last hour of trading.
The market in the option fluctuates live all day long and traders can come in and out of the binary bet. If, however, in the final hour the Dow is 10 - 20 points lower OR higher on the day the option will often trade below 20 or even below 10 or above 80 or even 90 conversely.
I have picked up a bet (or option) for as low as 7 that ended up closing at 100 - a gain of 14x in less than one hour. The differences before the most extreme in the last few minutes of the trading day.
However, most traders will be happy with doubling their money in just a few minutes. When the market is oversold in the evening and in the last two hours of trading gains of two or three times ones money is not unusual. For example the market is down, say 50 points and the bet to close up on the day is trading at say 13. A rally of twenty points, although it may peter out, will allow you to sell back that bet to binarybet.com in the high twenties or mid-thirties. So even though the bet will ultimately still expire worthless, as the market is not net up on the day, one nevertheless can trade out of the bet for several hundred percent profit. Such opportunities were virtually not existent until recently and yet so few people appear to be grasping them fully.
One bet to avoid is when the market is heavily down and the bet is very cheap. This is because the chances of a rally to race against the time depreciation are highly unlikely. For example, S&P to finish up on the day was just 5 for a 100 close on the evening this article was written, but the market was down seven S&P points (around 0.6%). The chances of a rally to countermand the depreciating value of this option were highly unlikely.
Those who are trading these strategies successfully are not making a big noise about it, for obvious reasons. The key to success is how you trade these opportunities. Greed is still the greatest enemy as traders will regularly over trade. For every multi-bagger one needs to realize that one will often lose ones capital to the binary company and they will be bagging your money to their bottom line.
This article was originally published in Traders' Magazine as part of a feature on binary betting.
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