By Darrell Martin
News is happening all the time around the globe. Certain reports can affect the market causing volatility, thus making the release something to trade. There are different strategies to be used depending on the degree of volatility generated by the report.
For example, if the market is going to move a great deal, but the direction is unknown, a straddle or strangle is a well-known strategy to employ. For news releases that will cause the market to move and then pull back, an iron condor or a butterfly is commonly used.
When trading binary options and the market is predicted to move some, but not become a trending market, a butterfly strategy is ideal. The setup is to sell an upper contract and buy a lower contract on the same instrument, with the same expiration time. This proposes that the market will stay below the upper strike price and above the lower strike price allowing the trader to collect on both contracts.
As an example, suppose there is news coming out that will affect the USD/CHF market. Let’s say previous releases have moved this market, but only caused it to remain in a channel. When choosing strikes to make up the “legs” (both sides) of the butterfly, look for around $25 profit potential. Checking the available strikes for the USD/CHF, find two with the same expiration time that will work. They will form the upper and lower strike levels. The upper, >0.9560 is sold for 27.00. The lower >0.9520 is bought for 71.00. Profit potential on the upper is $27 with $29 on the lower for a combined total max profit of $56. (Fees not included.)
This butterfly is 40 ticks wide. Trading with Nadex Binary Options, potential max profit, max loss or risk are clearly defined before any trade is entered. Potential losses on the sell side would be $63 with $71 on the buy side. These losses could be limited by employing risk management and placing stop losses.
Statistics Canada will release several reports on Friday, September 8, at 8:30 AM ET. Included are Employment Change, Unemployment Rate, Capacity Utilization Rate, Participation Rate, Full Employment Change and Part-Time Employment Change. They vary in the degrees of importance with the Employment Change ranking High. It measures the change in the number of people employed and is an indicator of consumer spending. Last month’s report was 10.9K. The forecast for Friday is 19K.
A binary butterfly may be the chosen strategy if trading Nadex binary options. An Iron Condor Strategy can be used if utilizing Nadex Spreads.
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