Best Option Type Based On Strategy/Market Condition

S4 - Select - Underlying Markets nadex binaries
1

Hello Darrell. First, I must thank you for all the terrific free education. Although I’ve been through most of the videos, I’m still scratching my head a bit when it comes to understanding when it’s appropriate to use binaries or spreads based on the strategy or market outlook. Would you comment on my understanding?

  1. When there is no news but you’re looking to trade directionally during volatile times do you prefer spreads OR do you also consider binaries given the fact that the strikes are now so close together?

  2. Do you favor binaries over spreads when you expect a range bound market?

  3. When you expect volatility but have no directional bias (can be news or just normally volatile time…like morning session in TF) do you prefer trading strangles on binaries or straddles on spreads?

Thanks.

2

Great questions :slight_smile:

  1. You can do either. You could do a OTM Binary (not my favorite if no news), a ITM binary do this all the time, and newer strategies i am teaching (double binary and ratio binary) are also good. Also for spreads directionally I usually use ATM spreads (like i teach for trading spread with apex)

  2. Yes most of the time i will use binaries over spreads for premium collection range bound markets. ITM binaries, Butterflies, or Ratio Binaries for range bound. (Can also do iron condors on spreads but this is a bit more advanced. Will be making a upgrade to the scanner to make this easier in the coming couple months).

  3. I rarely ever trade strangles with binaries. There are a few exceptions but that is a whole other long topic … Issues with them is you have to hit profit target or total loss. 90% of the time i do spread straddles. Do not do them on morning volatility it won’t work consistently.Expectation of movement is built into the price so just randomly doing spreads will have no edge it needs to have a reason to be executed due to the potential for more than expected volatility (ie morning is expected to be volatile not suggested - pre news like i do in news plan however gives you an edge due to fundamental shock. I prefer spread straddles when trading breakout non-directional bias. I do this only during news as with news you are looking for non-expected volatility by a fundamental shock causing the market to move more then expected.

Darrell

[quote=maxreturn]Hello Darrell. First, I must thank you for all the terrific free education. Although I’ve been through most of the videos, I’m still scratching my head a bit when it comes to understanding when it’s appropriate to use binaries or spreads based on the strategy or market outlook. Would you comment on my understanding?

  1. When there is no news but you’re looking to trade directionally during volatile times do you prefer spreads OR do you also consider binaries given the fact that the strikes are now so close together?

  2. Do you favor binaries over spreads when you expect a range bound market?

  3. When you expect volatility but have no directional bias (can be news or just normally volatile time…like morning session in TF) do you prefer trading strangles on binaries or straddles on spreads?

Thanks.[/quote]

3

[quote=darrell]Great questions :slight_smile:

  1. You can do either. You could do a OTM Binary (not my favorite if no news), a ITM binary do this all the time, and newer strategies i am teaching (double binary and ratio binary) are also good. Also for spreads directionally I usually use ATM spreads (like i teach for trading spread with apex)

  2. Yes most of the time i will use binaries over spreads for premium collection range bound markets. ITM binaries, Butterflies, or Ratio Binaries for range bound. (Can also do iron condors on spreads but this is a bit more advanced. Will be making a upgrade to the scanner to make this easier in the coming couple months).

  3. I rarely ever trade strangles with binaries. There are a few exceptions but that is a whole other long topic … Issues with them is you have to hit profit target or total loss. 90% of the time i do spread straddles. Do not do them on morning volatility it won’t work consistently.Expectation of movement is built into the price so just randomly doing spreads will have no edge it needs to have a reason to be executed due to the potential for more than expected volatility (ie morning is expected to be volatile not suggested - pre news like i do in news plan however gives you an edge due to fundamental shock. I prefer spread straddles when trading breakout non-directional bias. I do this only during news as with news you are looking for non-expected volatility by a fundamental shock causing the market to move more then expected.

Darrell[/quote]

Thanks for the quick, concise response! I have a followup question to my first question. I would think that given the close strike prices for binaries and if one’s forecast of direction is correct; that the reward to risk ratio of an OTM binary would be much better than a spread in most cases. Is the reason you favor a spread based solely on probability…that an ATM or ITM spread is more likely to profit than an OTM binary?

4

Well an OTM binary has to move or it will lose 100% guaranteed - so since your probability is much lower yes your payout is higher.

However, depending on the spread chosen, time chosen, market trading etc… the risk may not be that different for an OTM binary than an ATM spread as ATM could still be right near the floor or ceiling ATM does not mean the center of the spread it just means < 10 ticks to breakeven

The payout may or may not be larger depending on how far the binary has to move, At what price you will close it or if you are holding to expiraiton.

Also understanding that if not closed and not ITM the binary will suffer total loss if it expires OTM whereas a spread will simply have the different between entry and expiration as the net p/l

An ITM binary does not have to move, market can stay flat or go slightly against it so this is what favors it