By Darrell Martin
There are days when the market is all over the place. Other days, it seems to just sit there. As a trader, you must have strategies to use for all types of markets.
On a range bound day, also known as a flat market or a non-trending day, the butterfly is an excellent strategy to use. This is a good strategy to use if you trade during the evening or nighttime hours when the markets tend to move a little slower.
To set up a binary butterfly, buy a lower In-The-Money binary and sell a higher In-The-Money binary. The plan is to have the underlying market settle right between the bought and sold strikes at expiration.
When you look at your charts, notice the expected volume. It is important to have lower than expected volume.
With a butterfly, the market can move three ways and you will still profit. For the bought binary, the market can go up, stay in the middle or come down, as long as it doesn’t go below your strike. For the sold binary, it can go down, stay in the middle or go up, as long as it doesn’t go above your strike.
Ideally, you want the price to stay in the middle of where you bought at the bottom and sold at the top so that you receive max profit on both contracts. The following image may clarify this strategy for you.
Notice the downtrend on the left side of the image and how the right side is non-trending or range bound. If you were to buy a contract with a strike near the level of the lower blue arrow and sell a contract with a strike near the level of the upper blue arrow, the butterfly would be set up. As long as the underlying market stays within that range, you would make max profit.
Try to buy for around 75 to 80 and sell for around 20 to 25. This would give you about $40 - $50 profit potential.
Nadex offers 5-minute, 20-minute, hourly and daily contracts. The five-minute contracts can be hard to do because they move so fast and there are only five strikes available. The other contracts offer several more strikes making it easier to get the upper and lower contracts you need to set up the strategy.
Be sure to demo trade this strategy. Get it down and understand the rules before taking it live.