By Darrell Martin
You may be one of those traders who believes that when the market is not moving, there’s no trade opportunity. As long as there is price movement in the market, whether it’s up or down, as a trader, you are happy!
When the market is only moving sideways, it is like watching paint dry. You think you require at least a little volatility to take action.
In fact, there are still opportunities in a flat market. When trading binary options, you can be profitable in either flat or volatile markets. To receive the full settlement payout of the binary at expiration, the underlying market price needs to be higher than the strike level for a binary buyer. For the binary seller it is opposite: you want the underlying market price to be trading below the strike at expiration.
In this example, you have a channeling market. To effectively use binary options, you would want to either buy or sell the binary strike price which is ITM (in the money). For the binary buyer, that is a strike price which is below the current market price.
This is an immediate trade advantage for the buyer. To get that advantage, the buyer has to pay more, a larger portion of the $100 settlement value per contract. The further the underlying price is over the strike, the greater the advantage and the more it costs. Once you’ve bought that ITM binary option, you just want the time to go as fast as possible without the market moving back below the strike price. That way, you can collect the full $100 payout.
Example: Buying EUR/USD Binary > 1.1013 (3PM) trading at 89.75
Spot EUR/USD trading at 1.10223
Cost = $89.75 /contract (Max Risk)
Profit = $10.25/contract
Initial Trade Advantage = + 9.3 ticks (Spot EUR/USD price over strike)
Time left before Expiration = 1 hour 2 minutes
(Note exchange fees not included)
Remember the settlement payout is fixed at $100, so using this strategy means the profit potential is smaller. It’s a trade-off.