Would you trade an ITM strat that had a 3:1 risk/reward ratio, if

General Trading Forum
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I’ve back tested an ITM binary option strategy and over a one year period it had an 85% win rate. The typical risk/reward on the setup is 3:1 or slightly higher, however I’m able to understand the reasoning behind why it wins 85% of the time (from a market microstructure standpoint), and I further am able to detect when it’s a losing trade early enough that I’m able to close it out before actually losing the “3” of the 3:1 that I’ve put up. My back testing shows it as having a good Sharpe ratio (however back testing is hindered by not yet being able to determine historical prices for the various strikes, so I’ve had to estimate for the time being). I’m working on doing out of sample validation as well.

I know this is somewhat of a rhetorical question, but I’m interested in knowing if the experience folk among this group ever trade such strategies? I should also point out that the holding period for the strategy in question is often significant in the context of what most people on this forum and elsewhere seem to be willing to endure. I don’t see this as a problem however because of the low draw down that I’ve seen in my tests. I’ve since begun trading it live and it’s currently 100% profitable, so I’m looking forward ironically to a trade that goes against me so I can validate my early exit signal.

Welcome all thoughts. I am sure I’ll hear that if it works for me do it, etc., but just curious as to what others think.

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Many of our traders trade ITM binaries using multiple strategies. 85% win rate is a great win rate, but also boils down to profitability as you noted. If you are risking $85 to make $15, one loss wipes out a lot of wins and can be counterproductive. So you have to look at probability and profitability and apply good risk management to assure it works out in the end. Most of our traders use an exit strategy at approx $50. If the binary moves against you and hits the strike price you can exit for approx $50. So if you buy an ITM binary for $75, you have a $15 profit potential and it you exit at strike an approx $25 risk. So if you can maintain this type of 1/1 risk / reward ratio and keep an 85% win rate, you are dong well!