Advanced Binary Tactics and Manipulation

Binary Bets. They're quick, volatile and easy to understand. But how can one make money from them?

The only way two ways to make money off binaries are by either predicting the direction that the market is going in or predicting future volatility better than their volatility model. If you can get that bit right then the percentage of profitable trades goes through the roof.

I would say that the volatility factor is the part which the companies find hardest to calculate and is also the part where your strategy can fall apart if you don't factor in certain events.

In my mind I have 3 very basic strategies to start from...
  1. A strategy which simply milks the time premium out of a quiet sideways market.
  2. A strategy which waits for sudden and unpredictable volatility to occur which cannot be priced into a company's model in advance. This causes the quotes to move to the extremes of the range (i.e. <10 or >90) and offers cheap entries into positions where the remaining time premium is vastly under priced given the sudden short term volatility spike.
  3. A strategy which trades as many hours as possible and simply looks to follow the prevailing trend where winners are run to the expiry and obvious losers are cut before they expire against you. I have found that things like big disparities in Advancers/Decliners are great indicators in predicting trends in the Dow for example. The idea being to maximise gains whilst controlling losses.

For example, let's say the spread is 4 points...

If the market is bang on the strike the price would be 48/52. Let's assume the trend is up. If I buy 52 I am giving away 2 points as I am in effect paying 52 for a position technically worth 50. I am therefore, at that moment, down 2 points. Obviously if the bet goes on and expires at 100 I will make 48 points but, in effect, I am still down the 2 points in respect of the larger law of averages. If however the bet went against me and it started to fall I am not worried about the loss is the same way that I was not overjoyed at the win. What I am now worried about is making a decision regarding the open position. If I close it before it is worthless (so say around 10 points) and the bet would have gone on to lose then I am up 8 points overall (the 10 points saved minus the 2 point entry cost) The logic here is about mitigating the losses in as many of the losing bets as possible. I don't mean cutting them when they go 10 points against you. I'm only interested in saving perhaps 7 or 8 points on most of the losing bets. Quite often this is very easy to do especially on FTSE as you can simply look across multiple markets for clues on very short term trend. The idea is to deny the spread betting company the maximum payout by saving odd points here and there. Of course you run winners to the close. I've actually had some really nice runs playing this way. On one day I did actually have 8 winners and no losses.

Any views?

On the face of it I am convinced that it is possible to make a continuous income flow from these bets. I guess it is a case of not being too greedy!

Incidentally, the binary trading system that I experimented with involved using binaries to hedge futures positions. If I thought the market was trending down, I'd buy "closing up more than 50 or so from where it is now" binaries in a dip and sell the futures on a peak. The binaries protect the futures if the market breaks up out of the channel, and the profit on the futures outweighs the loss on the binaries if it trends down. It's useful for those situations where it tries to break out of the channel and then comes back in as it takes away your fear and keeps you in the trade. Occasionally it breaks the trend before you sell the futures and you get to sell the futures at the binary strike price, locking in a huge profit. This system is killed by low volatility though.

Another strategy would be to buy in the opposite direction when it is a very low price and the market has just moved a long way in a short timeframe. Wait for the recovery and take some profits from it. The trick here is knowing when to take what's on offer. Stay too long and you get nothing but if you get out too soon you throw away a lot of money. This is probably the best approach for a successful long term strategy. The Binary Bet model is as much in the dark as the traders here and their prices are forced in the immediate direction of an extreme market move. If you can spot the bottom of the price move before Binary Bet you can make good money in these situations.

The key is in understanding how the option (binary) is priced in respect to intrinsic value and time premium. At the start of the hourly the company providing the prices have to price their model according to how volatile they think that particular hour is going to be. If, at the start of the hour (lets say the first 15 - 20 minutes) the volatility picks up and turns out to be higher than the company predicted then an opportunity occurs in respect of undervalued remaining time premium (there is a far greater chance of the market moving back towards the strike than the price suggests). Logic therefore dictates that the price moving sharply lower in the first 15 minutes of the hour is 'self detecting' in nature - the market falling to say 15/85 in that period is itself indicative of potentially under priced volatility. If you could buy it <15 and then ride it and exit at around 50/50 then you'd likely turn a profit over a longer run. The problem is that you might only a few chances to trade the strategy a week.

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