August 3-7 Markets Continue to Climb

Trading Out of the Money Binary Options

The markets were tumultuous last week, but managed to remain resilient.

S&P 500 futures opened positive Monday above the T-Line (8 EMA), continuing its push upward. Until there's a close below the T-Line, investor sentiment remains bullish.

Click on Chart to Enlarge

With this information in mind it was time to take a look at Nadex for a bullish binary options strike price.

Shortly after the Opening Bell the /ES (S&P Futures - Sep) was trading at 3284. The nearest strike price with a Daily Expiration (4:15PM ET) was > 3293

So Here was the Proposition I was Trading:

"The US 500 Index will settle above 3293 by 4:15 PM ET Today when the market closes"

This is called an Out-of-the Money Binary Option. When I placed this trade, the market was at 3284, the marketplace of buyers and sellers determined that there was about a 30% chance that price would rise above the 3293 price level by 4:15 PM. 

My rationale behind the trade was that the market would continue to grind North for the day, and not reverse course. With $30 maximum risk per contract, I bought 5 contracts.

Trade Details:

Number of Contracts Purchased: 5
Maximum Risk per Contract*: $30   $150 total
Maximum Reward per Contract*: $70   $350 total

* prices do not include exchange fees

Click Chart to Enlarge

With Nadex Binary Options, every contract is equalized at $100. If, I'm assuming $30 risk for my out-of-the-money trade, then the person on the other side of the trade is putting up $70 risk in the belief that I will be wrong.

When the trade filled, the maximum risk ($150) is withdrawn from my account. The person on the other side of the trade put up $350, making the pot even at $500.

At 4:15 PM when the market closes, then there are only 2 possible outcomes:

1. I am right. The market closed above 3293, and I collect $500 (less exchange fees), or
2. I am wrong. The market closed at or below 3293, and I collect $0

Important Note: I am not married to this trade.

At any time, I can choose to exit the trade if I want to lock in a sure profit. I can also exit the trade if I feel the market is moving against my trade plan to minimize losses.

Trade Results

Click Chart to Enlarge

With an hour and a half until expiry, this contract was flashing $152 in available profit vs. $150 risked. The 3293 price level was holding up as resistance and the S&P 500 was up over 30 points on the day. Stochastics were overbought.

In these volatile markets, any end-of-day profit taking or a sell-off would take the shine off of a nice profit. Trade closed for 100% profit vs. capital risked.

What Happened at the 4:15 PM Expiry?

Just after I took the $152 profit, the market started selling off. It dove down to 3282, before trying to make a brief rally back. If this trade had been held until expiry, the payout would have been $0 and I would have last the $150 I put up as risk capital to make the trade.

Try Nadex Today, Risk-Free

What I like about Nadex the most is that every trade has capped risk that is known in advance before you place your trade. That's huge in these days of extreme market volatility. It's impossible for a trade to run away from you. No margin calls.

If you're curious about trading with Nadex, download their free demo here. Your account will be funded with $10,000 in play money and you can practice trading with defined risk.

You can fund a Nadex account for as little as $250. Nadex is available for traders in 41 countries.