By Darrell Martin
Even when the market opens wildly and then oscillates 20-40 points over the next 45 minutes, there are lessons to learn and trades which can be profitable. On August 21, 2015, the NASDAQ opened and quickly dropped 20 points in two minutes. It then continued to oscillate for the next half hour as shown in the image below.
As a trader, you always have choices on how to trade any situation. You may want to sell an In The Money (ITM) Binary Option. This would give you higher risk and probability, but a lower reward as you would have to risk more capital but have a greater probability of being profitable. If you choose to sell an At The Money (ATM) binary option, you would have a medium risk, reward and probability. You could sell an Out of The Money binary option, which would give you a lower risk and probability, but a higher reward. Remember with all binary options, it is an all or nothing settlement at expiration.
Spreads do not have all or nothing at settlement. Each tick is worth one dollar. When the NASDAQ opened so wildly on August 21, some traders chose to sell the US Tech 100 4330.0-4340.0 contracts since the market was already below the floor. These traders entered the trade before opening and as it dropped, took profits. Another trader also sold 10 contracts of the spread listed above at 4337.1 as well as an additional 10 contracts at 4349.9 of the US Tech 100 4335.0-4362.0 with an end of day expiration.
With 22 minutes remaining on the 10-point spread, those ten contracts were up $670 while the 30-point spread was up $1060. The 20 contracts brought in over $1700 in less than 40 minutes!
The traders all chose to get out of the trades in order to take profit. You could have chosen to remain in the trade but herein lies the lesson to be learned. Do you want your capital tied up all day? If your capital is tied up all day, what opportunities are you missing out on? Capital costs are a big deal! Taking profit frees up your capital to let you be ready for another short time-frame trade. The previous trade may have made a few more points if it were left on until expiration, but doing so may cause you to miss out on other opportunities.
Take your profit based on the charts. Yes, it is important to understand the movement of proximity and premium in relation to the price, but don’t get hung up on all of that. Trade what you see, not what you think.
Futures, options and swaps trading involve risk and may not be appropriate for all investors. Past performance is not necessarily indicative of future results.