Binaries

Darrell - another question in regards to the recent post; which strategy would need the least monitoring during the trade to take profits or close the position to minimize the loss? Thanks

the least monitoring on binaries involves 1 of 3 scenarios in the following order

  1. ATM/ITM binary held to expiration - like the core trades - entered at 1:1 risk/reward ratio and held to expiration
  2. OTM binaries - enter and set take profit price - risk is low - however you may want to exit if profit target not hit within a decent period of time
  3. ITM binary premium collection - leave on until expiration - however it is good to monitor and exit at the loss if it hits your strike to cut down the loss

The reversal strategy is not a straddle. A trend reversal is directional. A straddle is a random walk strategy. Random walk is when you don’t care how far the market will go so long as it moves enough.

There are 5 parts to trading that i have broken trading down to…I call this the S5 formula

  1. Structure - basics - charts instruments how they work commissions etc…
  2. Strategy - ways to use instruments/combine them - i.e. by sell future/forex/stock/option/binary/spread - buy a call and put - straddle - buy a binary and sell a binary - straddle etc… - i mention this as a strategy does not work or not work - it needs the following 3 pieces to be executed
  3. System - this is how to execute the strategy - rules for entry, exit take profit etc…
  4. Style - this is WHEN to execute and WHEN NOT to execute your system taking into account market conditions and which instrument/strategy to use with the system (i.e. OTM/ITM/DITM binary etc…) (Technical, fundamental, seasonal, and statistical --the four areas of what i call diagnostic trading)- i.e. don’t do a APEX long near the +1 deviation
  5. Self - this is money management, trading psychology, and gut

A trend reversal or straddle is a strategy

A system is the basic rules you use for executing it for entry exit

Style is when to do it

When you say daily deviation level is neutral/zero - assuming you mean the market is at yesterdays settlement price?

for strategy one - if you wait to close to expiration you won’t have time for the market to move - now doing it around a news annoucment can work - or around 7-8 AM before market opens can work - you need to have the expectation that it will make the move to a deviation level that is far enough to cover the risk on both sides and ideally make at least a 1:1 - i.e. risk $10 on both sides with goal of selling for $40 - so you are risking $20 but also trying to make $20

i have found the most consistency on market timing by combinig the APEX strategy with the deviation levels

again i would not do a straddle near expiration

a strangle is not possible on binaries as a strangle is buying and selling at the same strike so the trade would cancel out - if done on say wall street 30 and US 500 then the P/L potential would be $0 - unless you planned on closing out both sides - this is very risking as in reality to be at a 1:1 you would need both to expire ITM being at same strike/time would be most likely impossible - so you would need o do a straddle

the important thing is picking something like the deviation levels, choosing the appropriate realistic strike - ie a deviation level - then exiting when it hits the strike

Great thread reply with additional comments and questions and we can keep it going

[quote=bronson1017]Hi Darrell,

What about potentially entering a daily binary straddle (in a flat market or range bound market) when your daily deviation level is neutral or at zero - and then just take profits on both sides when the market pricing swings up and down across the straddle strike price? Could that generally be a profitable strategy? Seems to me that you would have to get closer to expiration and have the market swing both ways in order for it to be profitable overall.

Or, is swing trading the binaries with your reversal strategies using your daily deviation levels, apex strategy, pivots, fibs, etc., the way to go for more consistent profits?

How about a strangle type strategy in a choppy price or volatile type market? - your total entry cost & risk would be much less but the market would really have to be moving up and down across your strangle strikes to get some good profit taking going - especially nearing the strangle expirations.

And, in the 3 strageties listed above (if they in fact work!), would the daily binary trades or the 2-hour binary trades work best?

Just trying to come up with a consitently profitable binary strategy to utilize for additional income

Thanks![/quote]

1 Like

Great information! - Thank you Darrell

You state in your Nadex videos that +1 and -1 deviation levels are where the market will “generally” trade in that range on a daily basis…that is if we are trading a daily binary, correct? I think you said it has a 70 percent chance of trading from the +1 to -1 deviation levels or vis versa.

What if we were to use the the deviation levels for trading the 2-hour binaries? Would we tend to use the .5 and .7 levels? How acurate would that tend to be in just a 2-hour window? What other tools would you use to confirm these price targets and moves? Fibs?

Would the daily binaries even have enough strike prices to use this strategy? To have price targets to hit in the trade?

Bronson - I have been working on an Iron Condor type strategy based on Darrell’s deviation numbers. I worked through some issues with Darrell and am currently testing it (I started middle of last week). So far, I have three days of real forward testing results which I believe are much better than any backtesting results. I was going to wait until after I get a week or so of real results before posting the strategy. The strategy is a set it and forget it type strategy (place trades at market open, leave positions on until close. Since you are looking for something similar, I will post the full thing tomorrow, with results and daily updates through the week.

Check this page for a detailed explanation on the deviation levels and the % for each level: http://apexinvesting.net/deviation-levels/http://apexinvesting.net/deviation-levels/

Approx 70% chance, exactly a 68% chance it will expire in between the +1 and -1 levels levels and a 32% chance it will expire outside of them.

The levels are for 1 day whether using binaries, spreads, futures, or forex.

The expiration time of the binary is not correlated to the levels except for the daily. The time is to small on a 2 hour time frame to make an accurate calculation as often a huge chunk of the move will happen in minutes (ie on a news annoucment market open close etc…)

Apex Power lines, pivot points, Fibs, support/resistance over a longer time frame (i.e. 30 minute and daily) 50 DAY not bar but day and 100 and 200 day Moving averages are all areas you can chart. The more that line up the more you have what is called “conflucence” meaning a lot of orders will be there and this is usually going to be a point that will be difficult for the market to penetrate especially at a +1 or -1 dev. The .5 and .7 can be used for revesals but are even better to use for tightening stops (ie after market breaks that level move it up below previous bars low and trail it up - (on nadex can’t use stops so you just exit at market if it breaks that low) - one method is to tighten stops only when it hits each level - another is on each bar - the each bar method is better as it locks in more gains but can get stopped out easier - the each bar method works best with the Apex Renko bars are they eliminate the chop in charts price action…

The dailies have the most strike prices available… I don’t believe i have ever seen the deviation levels not have a strike near them…the only exception may be corn or soybeans where they set the strikes earlier and the market moves a lot before the open…

They are good for profit targets and strike selection - i.e. long apex signal, using the deviation levels to pick a strike - then exiting when it hits that strike around $45 (when buying ) to $55 (when selling)

[quote=bronson1017]Great information! - Thank you Darrell

You state in your Nadex videos that +1 and -1 deviation levels are where the market will “generally” trade in that range on a daily basis…that is if we are trading a daily binary, correct? I think you said it has a 70 percent chance of trading from the +1 to -1 deviation levels or vis versa.

What if we were to use the the deviation levels for trading the 2-hour binaries? Would we tend to use the .5 and .7 levels? How acurate would that tend to be in just a 2-hour window? What other tools would you use to confirm these price targets and moves? Fibs?

Would the daily binaries even have enough strike prices to use this strategy? To have price targets to hit in the trade?[/quote]

Nadex is adding even more binary intraday strikes to both its FX and Index products, as their intra-day binary options continue to gain in popularity. Currently, Nadex offers 3 binary contracts for each two hour intraday trade time. They are increasing the number of contracts they offer on their FX and selected Index offerings from 3 to 9 strikes!

The Exchange will begin listing new binary strikes on intraday options, offering an expanded range of strikes and potentially a lower cost of entry to investors who are using intraday options in their trading and hedging strategies. This new program extends to intraday binary option FX and Index classes, and all other contract terms remain unchanged.

Starting on Monday, December 3, 2012, Nadex will implement the following:

Nadex increasing the number of Binary Intraday FX contracts available for each two-hour intraday trade time from 3 to 9 strike options for all FX pairs (EUR/USD, GBP/USD, USD/JPY,

AUD/USD, USD/CAD, GBP/JPY, USD/CHF, and EUR/JPY.)

Nadex is also increasing the number of Binary Intraday US Index, FTSE 100 and Germany 30 contracts available for each two-hour intraday trade time from 3 to 9 strike options.

Additionally, Nadex is adding new intraday closes for the FTSE 100 & Germany 30 binary contracts at the following time intervals: 5 AM, 6 AM, 7AM, 8AM and 9AM.

Bronson this looks excellent…

Also Nadex just annouced they are adding more strikes to the intraday binaries. This could open up a lot of potential trades like iron condors.

i have been doing a strategy over 6 years on iron condors on the RUT on monthlies that has only lost a few times it can be a great strategy if done correctly. I like them On nadex much better as you don’t have to wait a week or a month you can do them daily or even on the 2 hours binaries.

I will post several comments regarding what a iron condor is for newbies and thoughts when designing/testing a system for them.

What is an Iron Condor?

An Iron Condor is when you sell a call and buy a higher call. (also called a vertical, credit spread, and bear call spread)…AND then sell a put and buy a lower put (also called a vertical, credit spread, bull put spread)

It will look like the following Bought Call $1030 strike for for $13.00 Sold Call $1010 strike for $18.00 Credit of $5.00 (max profit on call side)

XYZ Market i.e. at $1000

Sold Put at $990 strike for $18.00 Bought Put at $970 strike for $13.00 Credit of $5.00 (max profit on put side)

If the market remains in between the sold call and the sold put at expiration of the options then the trade will have max profit

If the market expires above the sold call then it will lose but the loss is capped at the difference between the sold call and bought call - less the credit received - i.e. 1030-1010 = $20 - credit received = 18-13 - 5 - net max risk = 15

If the market expires below the sold put then it will lose but the loss is capped at the difference between the sold put and the bought put - less the credit received - i.e. 990-970 = $20 - credit received 18-10 = 5 - net max risk = 15

In addition, with the $5.00 credit on both sides it could expire $10 above the sold call or $10 below the put strike and be breakeven - any higher or lower and a loss will occur anything within $10 above and $10 below and the trade will be profitable

NOTE: an iron condor is technically defined as having the sold strikes being the same width apart as the sold and bought strikes - i.e. in the example above all strikes bought to sold … sold to sold… and sold to bought strikes are $20 apart

An iron albatross/pterodactyl is will have the sold strikes further apart - i…e $20 between teh sold and bought call and $20 between the sold and bought put - but $40 between the sold call and sold put… However people even often refer to this as an iron condor so i will to to make communication easy…

NOTE This is an example on vanilla call and put options - things work quite a bit differently if using this on binaries.

With traditional iron condors you buy the spreads to cap your risk - this also results in giving up much of the potential profit- i.e. selling 1 strike for 18 is a $18 credit but buying the other one for 10 brings the net credit down to only $5.00. Without this you would have potentiall unlimited risk on the way up and a risk down to 0 on the way down. Without buying them this is called a naked straddle - a naked call (without protection and the riskiest strategy of all option strategies) and a naked put without protection (note a naked put has the same risk/reward graph as a covered call - a horrible strategy)…this large risk would make the margin huge - so you reduce the margin by reducing the risk by buying the further out calls and puts

The reason you do an iron condor is premium collection because you think the market will stay within a range. That is why something like diagnostic deviations are great as they help you define a range based on implied volatility in the market.

Time works in your favor - so time is money… if the market stays flat moves up or moves down but stays within the range of the strikes you will profit

How Do You Do An Iron Condor On Binaries

So now lets talk about how to make money off time…usually the big money makes on options are the time collectors - if you trade binaries just think about how many 5, 10, and 20 binaries you have bought that have lost…you could have been on the other side and collected the premium - that is what this strategy is all about.

With a binary you don’t need to sell a binary and buy a binary because a binary already has capped risk. $100 max - if sold at 20 then risk is 80 …if bought at 80 risk is $20 etc… so you only need one binary on each side to do a “iron condor” risk model like strategy

to do this you would sell a deep in the money binary - and buy a deep in the money binary

i.e. sell a binary at 84 and buy a binary at 14.50 ie sell the 1393 strike on US 500 and buy a 1420 strike on US 500 when the market is at 1406.5 these are both over 13 points away so you could use these if the market had a 13 strike diagnostic deviation expectancy


binarypriceladderexamle.JPG (73.5 KB)

if the market stayed between 1393 and 1420 you would keep all the profits

(note i will not include exchange fees to keep it simple - there are no commissions on nadex - exchange fees are .90 per order at $9.00 max with no fee if trade takes maximum loss) - also note you can only do this on price ladder binaries - nadex.com for us residents

for international residents (price ladder and also no touch binaries on IG could be used — note no touch binaries will lose if the strike is touched… price ladder binaries the strike could hit the price and go higher/lower and it could still win if it comes back down at expiration - plus you can exit earlier)

So lets say a 1 deviation has a 68-70% chance of the market staying within the range at expiration that means the trade should win 7 out of 10x

The advantage of using nadex/ig price ladder binaries is you can do this daily and possibly every 2 hours as well…instead of just weekly or monthly

Probability is not in your favor in this scenario

Planability is in your favor on sit and forget (but this has issues) (note when designing a system for iron condors you need to have consistent entry times - to do this on binaries at 1 deviation levels and get similar risk/reward on both sides it will need to be entered within a few minutes of the binaries starting trading time - see Helpful links above - nadex - contract specs - and click on the market to see the binary start trading hours for each market)

Probability is great 70% etc…

Not including commissions if we round it off to $15 on each side for a net credit of $30 if it stays in the range then there is a $85 loss on one side if it expires out of one of the strikes (less a 15 credit from the other side) for a net loss of $70 - making your net profit 0

30 profit 30 profit 30 profit 30 profit 30 profit 30 profit 30 profit -70 loss -70 loss -70 loss 0 NET Profit (not including fees)

It can’t expire outside of both strikes so one side will profit… - this gives you a net profit of $0 - (plus 20 commissions on entry one above and below strike - and 10 on the side that won - for 30 exchange fees for a commission of $27 for a net loss of -27 (even worse if you factor in the actual fill price was a credit of 28.50 on losing trades

The issue with doing this on binaries is at expiration binaries are either worth 100 or 0 - on vanilla calls and puts it could be less as you do get to have the credit even if it is above your strike

if profitable you make 100 less your risk on the trade (in this case 85 on each side) so $15 on each side or a total of $30 max profit on profitable trade - with a risk of $70 on a losing trade

so you have to be right more than 70% of the time - i.e. 80% of the time to be profitable on the trading system as a whole

30 profit 30 profit 30 profit 30 profit 30 profit 30 profit 30 profit 30 profit -70 loss -70 loss 100 NET Profit (not including fees)

So what can be done to fix this issue? - collect more premium is one solution - but you will probably have to get closer which increases risk of loss…or you could say collect 25 on each side and let the market oscillation fill you - so you get a $50 credit

50 profit 50 profit 50 profit 50 profit 50 profit 50 profit 50 profit -75 loss -75 loss -75 loss 125 NET Profit (not including fees)

but if one side is not filled half the time (which is likely then the r/r changes drastically

50 profit 50 profit 50 profit 50 profit 25 profit 25 profit 25 profit -75 loss -75 loss -75 loss 50 NET Profit (not including fees)

So what can be done to solve this issue…

One solution is the following…

This makes the strategy a not set it or forget it strategy

sell at $15 on both sides (i.e. the strikes priced at 85 and 15) for a net credit of 30

then exit both if it hits either strike assume a $12.00 profit on the one strike (3.00 of premium left in it) assuming at the money with bid/ask spread makes a the offer 53 and the bid 47 and exiting at $53 on the sold strike or 47 on the bought strike - for a net of 47-85 (on sold strike) or 15-53 (on bought strike) for a net loss of $38

This brings us to the following if we have the same 70% winning rate

30 profit 30 profit 30 profit 30 profit 30 profit 30 profit 30 profit -38 loss -38 loss -38 loss 96 NET Profit (not including fees)

however we will probably lose at least one additional time as we are exiting if it touches our strike the following would be the net 30 profit 30 profit 30 profit 30 profit 30 profit 30 profit -38 loss -38 loss -38 loss -38 loss 28 NET Profit (not including fees)

(note exchange fees would be about -36 - 10 trades x 2 strikes entry 10 trades x 2 strikes exit for a net of 28-36 for a net of -8

Now if we waited for each side to get filled at 25 and only got filled on one side half the time the following would play out

50 profit filled both 3 50 profit filled both 3 50 profit filled both 3 25 profit filled one side 2 25 profit filled one side 2 25 profit filled one side 2 -28 loss filled one side 1 -28 loss filled one side 1 -53 loss filled both 3 -53 loss filled both 3 63 NET Profit (not including fees) 20.7 commission

net $42.30 after commissions

this is not a bad scenario - consider this - you are putting up $150 of risk per trade $75 on both sides -

after 10 trades you netted 42.30 on the consistent use of $175 - that is a net profit of 28% every 2 weeks if done daily

the challenge is making sure you are available to close the trade when it hits the strike - so you will need an alert to go off at least 1 strike away if not more for text or computer alert - i.e. Ninja can be programmed to do this, TOS can easily do this (need funded live account for live data), Tradestation, MT4 programmed etc… - and then sit there and baby sit it to exit at market if it gets to the strike - so this brings the challenge of planability also you must have the razor sharp discipline to close it when the strike is hit and enter the order correctly

There are a lot of other ways to do the trade - combining strikes - hedging it by actually doing another strike further out - rolling the strikes further out to cover the risk - using the 2 hour binaries to help hedge the risk (with the introduction of the new additional strikes by nadex today this will be much easier) - etc… - there are a lot of possibilities - but in all systems consider how often you profit versus how often you lose - how much you make when you win versus how much you lose when you lose

Please post questions/comments/ideas in follow up to this i look forward to the discussion on how to combine nadex/ig price ladder binaries and diagnostic deviations for a consistent profitable system