By Darrell Martin
United Kingdom Prime Minister David Cameron promised if he won the 2015 general election he would hold a referendum giving Britain a chance to say whether to remain or leave the European Union of which they have been a member since 1973. His own Conservative Members of Parliament as well as the UK Independence Party (UKIP) had called for such a vote saying they had not had a say in the matter since 1975 and many things had changed since then. In 1975, they had voted to stay in the EU.
Brexit is a word that is a shorthand way of saying the UK leaving the EU, actually merging the words Britain and exit just as Grexit was used as a Greek exit from the EU in the past.
A referendum is a vote where those voting can answer “Yes” or “No” to a question and the side with more than half of all the votes cast is considered the winner. Polls in the UK will be open on June 23, 2016 from 7:00 AM local time (2 AM ET) until 10 PM (5 PM ET.) First results are expected about midnight (7 PM ET) with more results trickling in until final results due about 7 AM (2 AM ET) on Friday, June 24.
Traders can expect increases on implied volatility and should exercise caution if trading any FX position. Movement is expected on the pound and euro markets as they are playing against each other. Three markets directly affected by the pound are GBP/USD, GBP/JPY and EUR/GBP. Two other markets, which will be impacted by the euro are EUR/USD and EUR/JPY.
When there is high impacting news that can cause big market moves, traders can expect margin calls unless they are trading using defined risk. The volatility will be in the markets because of the magnitude of this event. How will it affect trading binary options? A binary contract is a reflection of a probability. There could be huge moves in reaction to this type of announcement, depending on how the vote comes in and when the final tallies are released. Prices will move closer to the center, closer to 50/50, making them around $50 on binaries. Traders can expect volatility all week.
Spreads may be easier to trade. Instead of being all or nothing like binaries, traders can use different strategies and not have to worry about the fast movement going on in the binaries. With spreads, traders can choose a directional, neutral or breakout strategy.
You may trade the Brexit results with Nadex EUR/GBP spreads. Whether you put up $20 or $2000 as your risk that is the most you can lose. You will not receive a margin call no matter how high or low the market swings because your risk is defined and capped. Due to the volatility, there will be plenty of things to read about in the media where traders received margin calls and lost more than they should have. However, none of them will be traders who traded using Nadex spreads and binary options.
As London’s session opens around 3:00 AM ET, big moves in the currency markets will begin to be seen and you can begin trading Nadex spreads as early as Sunday evening. Another big move may happen when the New York session opens. This cycle could continue throughout the week.
If you want to trade directionally using spreads, you could choose a Near The Market (NTM) spread with low to no proximity. Depending on premium, you could choose a neutral premium collection Iron Condor strategy or a breakout premium paying Straddle strategy. If premium is high, then an Iron Condor can be used. Try for as much profit potential as possible, with it split as evenly as possible between the spreads.
If premium is lower, a breakout Straddle strategy can be used. This is the exact opposite of an Iron Condor. Risk should be as low as possible, and dispersed as equally as possible between the spreads. This is the strategy to use when it’s expected the market will take off and fly.
The real advantage to these strategy opportunities trading the Brexit referendum is Nadex having defined capped risk. The total risk is known and paid up front, and can be further managed with stops when necessary, making risk realistic. No one will receive a margin call from Nadex, while they trade this highly volatile event.
