Binary options: S&P 500

I opened a short binary option position on the S&P 500 through Nadex, which uses the contract symbol US500.

S&P 500 (US 500) Daily Binary

Binary option short the $2,133 contract
bought May 21 at 10:30 a.m. New York time for a credit
and expiring May 21 at 4:15 p.m.

With the price at $2,129.58, implied volatility stands at 12.7% with 335 minutes remaining before expiration.

Ranges implied by options

Week	SD1 68.2%	SD2 95%
Upper	2135.71	2142.56
Lower	2122.03	2115.19

Implied volatility 1 and 2 standard deviations
The Chart

Click on chart to enlarge.

SPX at 10:48 a.m. New York time, 3 days 5-minute bars, all times New York time

Using Elliott wave analysis, I've counted the spike Wednesday afternoon that coincided with the release of the Federal Open Market Committee minutes as wave B {-4} to the upside. The index is now tracing out a downward wave C {-4}, which internally is composed of five waves.

The present wave 2 {-5} to the upside appears close to completing its work. However, I accepted a lower premium in order to provide $3.10 of cushion in case the wave still had some distance to travel.

The next wave, according to Elliott doctrine, will be a stronger downward move, wave 3 {-5}, and it is that anticipated downward movement that dictated the direction of my trade.

Decision for My Account

I've opened a short position with a 2133 strike and a $19.50 premium.

I shall use the casino exit rule, where I leave the position untouched until expiration.

Result

Shares declined by 0.05% during the lifespan of the position, which covered 86% of the trading day, or a -79.6% annual rate. The options position produced a 19.5% yield on debit, for a +30,595% annual rate.

Note 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.

-- Tim Bovee, Portland, Oregon, May 21, 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.

License



All content on Tim Bovee, Private Trader by Timothy K. Bovee is licensed under a Creative Commons Attribution-ShareAlike 4.0 International License.

Based on a work at www.timbovee.com.