Tim Bovee, Private Trader: Binary Options Trade: S&P 500 (beta)

Monday, May 18, 2015

Binary Options Trade: S&P 500 (beta)

I'm experimenting with binary options on the Nadex platform (www.nadex.com). I don't have a full rule-set developed as yet, but generally I'm applying the same techniques that I use for my volatility plays on stocks and their options. If I can satisfy myself that I can create an edge in these sorts of trades, I'll add it to my collection of strategies.

S&P 500 (US 500) Daily Binary

Binary option long the $2,124 contract
bought May 18 at 12:22 p.m. New York time with a debit
and expiring May 18 at 4:15 p.m.

With the price at $2,126.92, implied volatility stands at 12.8% with 230 minutes remaining before expiration.

Ranges implied by options

Week	SD1 68.2%	SD2 95%
Upper	2,132.62	2,138.31
Lower	2,121.23	2,115.53

Implied volatility 1 and 2 standard deviations
Ideally, I want my strike price on the contract to be beyond the one standard deviation range. However, Nadex normally has just a couple of strikes on the board, so that possibility wasn't available to me. I took the risk anyway, leaving 0.13% of the lower end of the range outside of the profit zone.

Result

Shares rose by 0.11% during the lifespan of the position, or a 241% annual rate. The options position produced a 52.0% yield on debit, for a +117,301% annual rate.

-- Tim Bovee, Portland, Oregon, May 18, 2015

References

My volatility trading rules can be read here.

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Disclaimer

Tim Bovee, Private Trader tracks the analysis and trades of a private trader for his own accounts. Nothing in this blog constitutes a recommendation to buy or sell stocks, options or any other financial instrument. The only purpose of this blog is to provide education and entertainment.

No trader is ever 100 percent successful in his or her trades. Trading in the stock and option markets is risky and uncertain. Each trader must make trading decisions for his or her own account, and take responsibility for the consequences.