Out of the Money (OTM) trades with Nadex offer the opportunity to make significant profits on very little money risked. Since the probability of OTM trades expiring successfully is low, it is important to have a strategy that predicts a significant breakout or a reversal in the markets.
Today, I wasn't inspired by the markets at the opening bell. The S&P 500 futures were diving on Greek default worries and several bearish economic reports from the U.S. From 6:40am - 9:40am, the S&P 500 futures market fell 14.25 points. Would the market continue to fall, or would it bounce back?
Just after 9:40am EST, Sean Jantz, founder of the Binary Trade Group posted a message on their private Facebook chat page that he was BUYING the /ES. Buying? Really? I had to take a closer look. He had chosen an in-the-money trade, risking $80 to make $20. He was trading from a position of extreme safety, and I had little doubt that his trade would be successful.
But if a reversal was truly in play, I had to take a look at the charts:
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| Click on Chart to Enlarge |
Every night, Sean prepares his "Battle Plan" for the /ES (S&P 500) , /TF (Russel 2K), /CL (Crude Oil) and /GC (Gold) futures markets. He plots Value area boxes, historical points of control (POC) and daily deviation levels. Then he shares his ThinkOrSwim (TOS) workspace with his subscribers, along with a YouTube "Battle Plan" for the /TF and /ES markets to help members follow his trading plan (see video below).
Looking at at the charts today, you can clearly see the bearish momentum in the /ES between 6:40 and 9:40. The market dove was below the Value Area Low (VAL) box shown in gray, and diving through the -.5 deviation level before hitting the -1 standard deviation level. According to Sean, there's a 70 percent probability that the market will close above the -1 deviation level. Sean placed a daily trade, buying at 2064, just below the -1 deviation level. He risked $59.25 to make $40.75, per contract. The odds were on his side.
Using the same information, I was wondering how far the market would make its reversal. Could the market move from the -1 deviation level, which was acting as support, all the way back up to the -.5 deviation level? If so, what kind of OTM trade would Nadex offer me?
I looked at the Nadex Charts and selected the 10am-12pm time frame. The market was trading around 2067 just after 10am. Looking at the price ladder, I took a Nadex BUY proposition at 2074.5, risking a maximum of $13.25 to make a maximum of $86.75 per contract. The 2074.5 strike price was just a hair below the -.5 deviation level. Very little risk for a potentially nice return.
Here's how the trade played out:
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| Click on Nadex Chart to Enlarge |
I opted to cash out. I felt that the -.5 deviation level was going to be a hard resistance level. My contract was worth $57 in profit, so I decided to exit the trade and take profit. As soon as I cashed out, the market made a sharp downward reversal, which made me feel better about my decision. Ultimately, the market turned back up before barely expiring ITM at 2074.80. If I had held the contract until expiration, I would have taken the full $86.75 profit.
Here are the trade results:
I bought this contract at $13.25 and sold it for $70.25, resulting in a $57 profit, less $1.80 in exchange fees. With just $13.25 at risk per contract on this trade, I realized a better than four-fold return on capital risked. If I had traded 10 contracts, I would have risked $132.50 for a $570 profit.
Conclusion:
Finding OTM trading opportunities with Nadex offers low risk for potentially high reward. These trades can be really fun when they work.
In the free eBook "Trading Made Simple - Strategies that Risk less than $100", Sean Jantz outlines his mindset and high robability strategies for trading Nadex binary options.
Important Note: OTM strategies only work if the markets are poised for a strong reversal or breakout. If a reversal or breakout doesn't happen, you will likely lose most or all of your capital risked. Fortunately, in this case. $13.25 was a maximum risk worth taking.
If you would like to read more about this strategy, along with 10 other Nadex strategies, make sure to download "Trading Made Simple - Strategies that Risk Les than $100". It's new from TradingPub, and it's free!
If you would like to read more about this strategy, along with 10 other Nadex strategies, make sure to download "Trading Made Simple - Strategies that Risk Les than $100". It's new from TradingPub, and it's free!
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Disclaimer
The opinions expressed in this blog are solely those of the author, and should not be construed as trading advice. I am not a registered or certified financial planner. There is a very high degree of risk involved in trading. Past results are not indicative of future returns. All individuals affiliated with this site assume no responsibilities for your trading and investment results. The indicators, strategies, columns, articles and all other features are for educational purposes only and should not be construed as investment advice. Information for futures trading observations are obtained from sources believed to be reliable, but we do not warrant its completeness or accuracy, or warrant any results from the use of the information. Your use of the trading observations is entirely at your own risk and it is your sole responsibility to evaluate the accuracy, completeness and usefulness of the information. You must assess the risk of any trade with your broker and make your own independent decisions regarding any securities mentioned herein.
