Binary Options Strategies for Directional and Volatility

200 BINARY OPTIONS

So the first and most obvious practical rule to mitigating the impact of
unforeseen news events on your account is proper risk management. Once
you have this in place, there are a few questions that you need to answer.

First, will you hold positions while economic data releases are coming
out? For example, let’s assume that you are trading a binary options short
volatility system. Are you going to stay in your trade during the nonfarm
payroll economic data release? This is something that you have to test for
and demo trade before deciding on how to proceed with live money.

However, when you are trading a volatility long system, the economic
data release can work to your advantage. This is because with a volatility
long system you are actually banking on a big move in one direction or
another.

Certain technical traders believe that the economic data releases and
news are already priced into the market and simply choose to ignore the news
and economic data releases. If you choose to do this, it is even more impor-
tant to maintain proper risk management and position sizing, as you can be
almost certain that markets will make huge moves due to news releases.

Of course, the fact that you are trading binary options provides you with
a certain safety net. This is due to the fact that with binary options, you are
always fully collateralized and can never lose more than you put in. So no
matter how huge a move the underlying makes in one direction or another,
you are protected by the collateral that you put up on the binary option trade.

For example, if you are trading vanilla put/call options with a volatility
short strategy, you are essentially selling a call and selling a put. If the mar-
ket makes a huge move in one direction or another, there is no limit to how
much you can lose. In fact, you can actually lose more than you originally
deposited into your account since you are trading on margin.

The image on the right of Exhibit 14.13 depicts the P&L of a short vola-
tility strangle with binary options. The image on the left depicts the P&L

Profit SHORT STRANGLE 300
or Loss
Stock Price Potential profit on 200
$200 at
1 lot position
$0 Expiration
(= $52.10) 100
30 35 40 45 50
0

Potential loss on –100
1 lot position

(= $47.9) –200

–300 Current market
(= 1250)

EXHIBIT 14.13 P&L Graph of a Binary Option Strangle and a Vanilla Option
Strangle

Risk Management 201

of a short volatility strangle with vanilla options. The x‐axis represents the
price of the underlying, and the y‐axis represents P&L.

Since binary options are fully collateralized, when doing a short vola-
tility spread, you can never lose more than you allocate to a trade. For the
long option, you can never lose more than the premium that you put up on
the trade per contract, and for the short option, you can never lose more
than $100 minus the option premium per contract.

Of course, this works against you with a volatility long strategy. When
trading a volatility long strategy using vanilla put/call options, your upside
is unlimited since the options are not capped at $100 at expiration. How-
ever, with binary options, no matter how much the underlying moves, your
profit is limited to the option premium for short trades and to $100 minus
the options premium on long trades.

The image on the right of Exhibit 14.14 depicts the P&L of a long vola-
tility strangle with binary options. The image on the left depicts the P&L
of a long volatility strangle with vanilla options. The x‐axis represents the
price of the underlying, and the y‐axis represents P&L.

As you can see, with volatility short spreads, binary options offer quite
a bit of the “disaster factor” protection due to the fact that you can never
lose more than you put up to enter the trade.

Another question to ask yourself when developing any trading system
is do you want to hold your position over the weekend? Typically, the mar-
ket closes at the end of the day on Friday and then reopens either Sunday
evening or Monday morning, depending on the trading instrument. Because
a lot of things can happen between when the market closes and reopens,
the market can gap. A gap in the market means that it opens either higher
or lower than it closed at the end of the previous week. If you are on the
wrong side of a market gap, you can lose your money very quickly.

Profit LONG STRANGLE 500
or Loss 400
30 35 40 45 50 Stock Price 300
$0 at Expiration 200
–$200 100

0
–100
–200

EXHIBIT 14.14 P&L Graph of a Binary Option Long Strangle and a Vanilla Option
Long Strangle

202 BINARY OPTIONS

Since binary options are only weekly, you cannot hold positions over
the weekend when trading binary options. However, if you have an intraday
system, you have to decide if you are willing to hold positions overnight.
Markets do gap from day to day, so once again if you are on the wrong side
of a gap between days, you can sustain a tremendous loss.

There is no right or wrong way to handle positions around economic
data or hold them overnight. What you absolutely must do is back‐test
each approach, then test it on a demo account. Then test it on a live ac-
count with a small deposit and determine how you will handle the rule
and stick to it.

It certainly sounds more exciting to just start trading, and that may be
the thing to do if you are looking for a gamble and not concerned with mak-
ing money. But if you want to make money, you need a very in‐depth plan
that takes into account every detail imaginable. That is the key to getting
ahead of the game.

BENEFITS OF BINARY OPTIONS ON
TRADING PSYCHOLOGY

As we covered earlier, the two biggest negative emotions that a trader has
to deal with are greed and fear. When it pertains to individual trades, these
two negative emotions can cause the trader to make the following two det-
rimental mistakes.

First, traders tend to cut their winners short and leave profit on the
table. You may enter a trade, see it go in your favor, and be so fearful of
losing that profit that you get out of your profitable trade earlier than you
were supposed to. Second, traders tend to let their losers run. This happens
because traders basically are too greedy to realize losses. They hold on to
their losing trades with the hope that the trade is going to come back into
positive territory for them.

Even if you cut your winners short and let your losers run by a few
points, over a large enough sample of trades, these numbers will add up
and eat into your profits or cause you to lose. For this very reason, binary
options are a great instrument to start trading to mitigate this problem. The
nature of binary options prevents traders from letting their losers run or
cutting their winners short. Let’s examine how this works.

As we learned, with a binary option there are two specific payouts at
expiration: $100 per contract if you are correct and $0 per contract if you
are wrong. If you choose to hold until expiration, there is no way that you
can possibly let your losers run or cut your winners short.

Risk Management 203

For example, let’s assume that you purchase a binary option and de-
cide to stay in the trade until expiration. If you are correct on your trade
and the price of the underlying ends up above the strike price, then you will
win on your trade and receive revenue of $100 per contract. This will give
you a profit of $100 minus the option premium. If you are incorrect, you
will receive nothing and lose the collateral that you put up, which is equal
to the option’s premium.

When selling a binary option, it’s the same scenario. If you hold un-
til expiration and you are correct, and the price of the underlying ends
up below the strike price, you will earn the premium of the option. If
you are wrong and the price of the underlying ends up above the strike
price, you will lose your collateral, which is $100 minus the premium of
the option.

Especially when it comes to a discretionary trading strategy and begin-
ning traders, this approach can be very effective. By waiting until expira-
tion, you no longer have to worry about when to exit your trade regardless
of whether it is winning or losing. You simply wait until expiration to see
what your outcome will be.

For this reason, even if you are getting into a directional trade, you
can use binary options instead of the underlying instrument and simply
hold until expiration. This way, you are no longer worried about when to
get out or if the price will move past your stop‐loss. Of course, if you are
actually trading the underlying itself, there is a possibility that you can
get more of a gain than the binary option can offer. To mitigate this, you
can control it with your position size. Let’s examine an example of how
to do this.

Using Position Size

Let’s assume that you want to make directional trades on the EUR/USD
cross when the rate is 1.3520. You predict that the rate will go up by 20 pips
to 1.3540. And you decide to set a stop at the big figure of 1.3500.

Let’s say that you have $10,000 in your account and you are willing to
risk 2 percent of your account or $200 on any one trade. When entering
this trade, you would put up 10 mini forex contracts. This is calculated by
dividing the max loss of $200 by the max single lot loss if your trade gets
stopped out—$20.

Summary Exhibit 14.15 contains all of the data points for this concept.
If you are correct and your trade reaches its profit target, you will end

up making $200. If you are wrong and you get stopped out, you will end up
losing $200. Now let’s consider a binary options scenario.

204 BINARY OPTIONS

EXHIBIT 14.15 Data Points for Trading Concept

Trade Figure Calculation

Underlying asset EUR/USD Account size × risk % = max loss
Market price 1.3520 $10,000 × 2% = $200
Move forecast 20 pips up 10 mini lots times $20 per lot
Available cash $10,000 Max loss / single lot loss = # of contracts
Stop loss 20 pips $200 / $20 = 10
%Risk 2%
Max loss $200

Max profit $200
# of contracts 10 mini contracts

Binary Options Scenario

Exhibit 14.16 is an option chain of EUR/USD binary options.
Let’s assume that you can buy an out‐of‐the‐money binary option for

$30 with a strike price of 1.3540. To find out how many contracts you can
trade, you can divide your max possible loss of $200 by the option’s pre-
mium (which is the most that you can lose per contract). Once you do this,
you will discover that you can trade up to six contracts.

Let’s examine what happens when you enter a binary options trade
with this scenario. If you hold until expiration and you are incorrect, you
will lose $180. However, if you are correct, you will receive revenue of $100
per contract. On six contracts that is equal to $600; once you subtract the
$180 collateral from this number, you end up with a profit $420. This is ac-
tually more than twice as much of a profit as you would receive by trading
spot forex.

So you may be asking yourself, what gives? I should just be trading
binary options all the time. Well, here is the caveat. When trading binary op-
tions, if you are holding until expiration, the price has to reach your target
by expiration. If you are making the same trade just trading spot EUR/USD,
then the target can be hit at any time. Essentially, there is no time limit.

EUR/USD > 1.3545 10.00 14.50
EUR/USD > 1.3540 27.00 30.00
EUR/USD > 1.3535 50.50 56.50
EUR/USD > 1.3530 73.50 78.00

EXHIBIT 14.16 Binary Option Chain

Risk Management 205

Keeping this in mind, if you know that your strategy is short term and
you do not plan to hold positions overnight or longer than a week, then bi-
nary options may be a great way to trade, especially with systems that have
hard profit targets and stop‐losses like those mentioned earlier.

There is even more to consider. As you know, with binary options you
do not have to wait until expiration to exit your trade. Keeping this in mind,
let’s take another look at the same scenario described above. Let’s once
again assume that the EUR/USD cross is trading at 1.3520. However, now
you think that it will move up 40 pips by the end of the day, rather than 20.

If you are trading spot and have the same preset stop‐loss, you can get
into your position with 10 contracts. If you are correct, you will earn $400
on your trade. This is $40 per contract multiplied by 10 contracts.

Summary Exhibit 14.17 contains all of the data points for this trade.

EXHIBIT 14.17 Data Points for Binary Option Trade

Trade Figure Calculation

Underlying asset EUR/USD Max loss / single lot loss = # of
Market price 1.3520 contracts
Move forecast 40 pips up $400 / $40 = 10
Available cash $10,000 Profit per contract × # of contracts =
Stop loss 20 pips max profit
%Risk 2% $40 × 10 =$400
# of contracts 10 mini contracts 20 pips × 10 mini lots = $200

Max profit $400

Max loss $200

Out‐of‐the‐Money 1260 Binary Option

Now let’s look at what happens if you trade an out‐of‐the‐money 1260
binary option. Let’s assume that the option is priced at $10 per contract.
Since the maximum loss per trade that you are willing to incur is $200, you
will be able to trade 20 contracts now.

If you hold until expiration and you are correct, then you will receive
$100 revenue per contract, for a total revenue of $2,000; once you subtract
your $200 collateral, you will receive profit of $1800. As you can see here,
by simply using an out‐of‐the‐money binary option, your profitability just
went up by four and a half times.

206 BINARY OPTIONS

But it actually gets even better. Let’s assume that the EUR/USD cross
goes up by only 30 pips within a few hours after you enter the trade. Since
binary options are a tradable instrument, the price of the option may in-
crease from $20 per contract up to $30 per contract. You may decide to exit
early and lock in profit. You will earn a total profit of $20 per contract (that
is $30 at the time of sale minus $10 at the time of your entering the trade).
Multiplied by 20 contracts, this will give you a profit of $400.

Exhibit 14.18 depicts a chart of the EUR/USD.

1.3570

1.3560

1.3550

Strike Price Market Price 1.3540
1.3530

1.3520

1.3510

1.3500

1.3490

9am 10am 11am 12pm 1.3480
1pm

EXHIBIT 14.18 Chart Depicting Movement of EUR/USD

Summary Exhibit 14.19 contains all of the data points for this trade.
As you can see in this case, with binary options, the underlying does

not have to make as much of a move for you to earn the same dollar return,
even without waiting until expiration.

DISCIPLINE OF EXPIRATION

Although based on the past example the hard expiration date is a negative, it
can also be viewed as a positive. Many traders will hold open losing positions
for too long and as a result eventually watch the market make an adverse

Risk Management 207

EXHIBIT 14.19 Data Points for Long Out‐of‐the‐Money Binary Option Trade

Trade Figure Calculation

Underlying asset EUR/USD
Market price
Expiration 1.3520
Strike price
Long/Short 1 Day
Size
Entry price 1.3520

Max loss Long (buy)

Collateral 20 contracts
Max profit
Ask price of $10/
Exit price
Profit or loss contract

$200 Ask price × number of contracts = max loss

$10 × 20 = $400

$200 Collateral = max loss

$1,800 ($100 – ask price) × number of contracts =

max profit

($100 – $10) × 20 =

$90 × 20 = $1800

Bid price of $30

Profit of $400 (Bid price when position closed – ask

price when position opened) × number of

contracts = profit

($30 – $10) × number of contracts =

$20 × $20 = $400

move, which will negatively impact their account balance. Binary options
allow the trader to get away from this negative habit simply due to the fact
that they have a set expiration date. You cannot stay in your position past ex-
piration. So whether you are profitable of not, you will have to exit the trade.

Some traders use what’s known as a time stop on their strategies. They
may enter based on a system or a catalyst and hold on to the trade for an
hour, a day, or a week. With binary options, you can get into an options
position with hourly, daily, or weekly expirations, and they will act as a
natural time stop.

KEY POINTS: PART 5

To take a quiz on this section, simply visit our companion education site,
www.traderschoiceoptions.net.

t Due to their dual nature of having binary (yes or no) results but also having
varied strike prices, expiration times, and underlying instruments, binary
options are perfect for developing a highly profitable trading system.

208 BINARY OPTIONS

t One of the most important parts of trading binary options is finding an
edge for your system by employing a variety of market indicators.

t It is essential to back‐test a new trading system over a long period of
varied trading (not consistently up or down) to ensure profitability in real‐
world trading.

t Human emotions (particularly greed and fear) can be extremely harmful to
trading returns.

t A trader must establish a solid trading strategy with set conditions for
trade entry and trade exit in order to mitigate the effects of emotions and
ensure continued success.

t The general rule in trade risk management is not to let losses on any one
trade exceed some certain percentage, generally 5 percent. This helps pro-
tect you from significant losses and mitigates emotions by keeping trades
small.

t Binary options are advantageous in risk management; because they are
fully collateralized, you cannot lose more than you put in.

t Expiration dates on binary options can also help risk management since
they keep the trader from “letting losers run,” which can incur excessive
losses.

Binary Options: Strategies for Directional and Volatility Trading. Alex Nekritin.
© 2013 Alex Nekritin. Published 2013 by John Wiley & Sons, Inc.

PART VI

Managing Your
Binary Options

Account

T his section will teach you proper money and account management
when trading binary options.
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209

Binary Options: Strategies for Directional and Volatility Trading. Alex Nekritin.
© 2013 Alex Nekritin. Published 2013 by John Wiley & Sons, Inc.

CHAPTER 15

Proactive
System

Improvement

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Proactive System Improvement 213

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EXHIBIT 15.1 Binary Option Drawdown Calculations

Trade # Trade P/L Balance Max Drawdown Calculation Notes

0 $ 100,000 $ 100,000 $ ‐

1 $ 5,000 $ 105,000 $ 105,000 $ ‐

2 $ 5,000 $ 110,000 $ 110,000 $ ‐

3 $ 5,000 $ 115,000 $ 115,000 $ ‐

4 $ 3,000 $ 118,000 $ 118,000 $ ‐

5 $ 2,000 $ 120,000 $ 120,000 $ ‐

6 $ (3,000) $ 117,000 $ 120,000 $ 3,000 First loss counts as

first negative

7 $ 2,000 $ 119,000 $ 120,000 $ 1,000 Add gain after first

loss until DD is

positive

8 $ (5,000) $ 114,000 $ 120,000 $ 6,000 Subtract loss after

first loss until DD is

positive

9 $ 7,000 $ 121,000 $ 121,000 $ ‐ Add gain after first

loss; DD becomes

positive

214 BINARY OPTIONS

5IJT JT GBJSMZ TJNQMF :PV UBLF UIF OFU FRVJUZ IJHI NBYJNVN BDDPVOU
CBMBODF TJODF JODFQUJPO BOE ZPV TJNQMZ EJWJEF UIF ESBXEPXO CZ UIJT
OVNCFS BOE NVMUJQMZ CZ UP HFU UIF QFSDFOUBHF ESBXEPXO

&YIJCJU JT UIF TBNF UBCMF
XJUI UIF QFSDFOU ESBXEPXOT BMTP
depicted.

%SBXEPXO EPFT OPU IBWF UP CF DBMDVMBUFE USBEF CZ USBEF JU DBO CF
EPOF XFFL CZ XFFL PS NPOUI CZ NPOUI )PXFWFS
JG ZPV DBO HFU TUBUJTUJDT
PO UIF NBYJNVN PQFO ESBXEPXO
JU XJMM CF FYUSFNFMZ CFOFåDJBM JO TFFJOH
UIF IJTUPSJDBM SJTL PG B TZTUFN

8IFO USBEJOH BO BVUPNBUFE TZTUFN PS NBOVBM TZTUFN
PS TJNQMZ B USBE
JOH TUSBUFHZ
ZPV DBO EFDJEF GPS ZPVSTFMG JO BEWBODF UIF NBYJNVN ESBX
EPXO ZPV BSF XJMMJOH UP UBLF CFGPSF ZPV TUPQ USBEJOH UIF TZTUFN

5IF NBYJNVN ESBXEPXO UIBU ZPV BSF XJMMJOH UP UBLF IJHIMZ EFQFOET
PO B GFX GBDUPST
JODMVEJOH

t Historical/Back‐tested drawdown that the system has experienced.
*G ZPV USBEFE B TZTUFN JO UIF QBTU PO B MJWF PS EFNP BDDPVOU PS TJNQMZ
CBDLĄUFTUFE UIJT TZTUFN JO UIF NBSLFU
ZPV TIPVME LOPX JUT IJTUPSJDBM
ESBXEPXO #BTFE PO UIJT IJTUPSJDBM ESBXEPXO
ZPV TIPVME LOPX XIFO
B ESBXEPXO CFDPNFT UPP CJH BOE B DVUPGG JT OFDFTTBSZ 0OF UIJOH ZPV

EXHIBIT 15.2 Binary Option Drawdown Calculations in Percentage Terms

Trade Max $%
Trade # P/L Balance Drawdown Drawdown Calculation Notes

0 $ 100,000 $ 100,000 $ ‐ 0.0%

1 $ 5,000 $ 105,000 $ 105,000 $ ‐ 0.0%

2 $ 5,000 $ 110,000 $ 110,000 $ ‐ 0.0%

3 $ 5,000 $ 115,000 $ 115,000 $ ‐ 0.0%

4 $ 3,000 $ 118,000 $ 118,000 $ ‐ 0.0%

5 $ 2,000 $ 120,000 $ 120,000 $ ‐ 0.0%

6 $ (3,000) $ 117,000 $ 120,000 $ 3,000 2.5% First loss counts

as first negative

7 $ 2,000 $ 119,000 $ 120,000 $ 1,000 0.8% Add gain after first

loss until DD is

positive

8 $ (5,000) $ 114,000 $ 120,000 $ 6,000 5.0% Subtract loss after

first loss until DD

is positive

9 $ 7,000 $ 121,000 $ 121,000 $ ‐ 0.0% Add gain after first

loss; DD becomes

positive

Proactive System Improvement 215

NBZ XBOU UP EP IFSF JT UBLF UIF NBYJNVN PS BWFSBHF IJTUPSJD ESBX
EPXO BOE NVMUJQMZ JU CZ PS FWFO 5IBO PODF ZPV TUBSU USBEJOH ZPVS
TZTUFN
JG UIJT NVMUJQMF JT FYDFFEFE CZ UIF MJWF ESBXEPXO
ZPV TIPVME
TUPQ USBEJOH BOE SFFWBMVBUF ZPVS TJUVBUJPO
t The potential return for the trading system. *G ZPV BSF BJNJOH GPS ZPVS
TUSBUFHZ UP HFOFSBUF ZPV QFSDFOU JO B ZFBS
UIFO JU XJMM OPU CF XPSUI
ZPVS XIJMF UP UBLF PO B QFSDFOU ESBXEPXO 0O UIF PUIFS IBOE
JG
ZPV BSF BJNJOH GPS QFSDFOU B NPOUI SFUVSOT
UIFO UBLJOH PO B PS
FWFO B QFSDFOU ESBXEPXO NBZ CF PLBZ *U BMM EFQFOET PO ZPVS SJTL
UPMFSBODF BOE BQQFUJUF 5IF HFOFSBM SVMF PG UIVNC JT UIF HSFBUFS UIF
SFUVSOT ZPV BSF HPJOH GPS
UIF IJHIFS UIF ESBXEPXO ZPV TIPVME QMBO UP
withstand with your system.
t 20 percent rule. 5IJT SVMF JT TJNQMZ XIBU JU JT .BOZ USBEFST TIZ BXBZ
GSPN USBEJOH TZTUFNT XIFSF UIF NBYJNVN IJTUPSJD ESBXEPXO JT IJHIFS
UIBO QFSDFOU 0ODF BHBJO
IFSF UIF OVNCFS EFQFOET PO UIF SFUVSOT
ZPV BSF HPJOH GPS #VU
JEFBMMZ
ZPV XBOU UIF NBY ESBXEPXO UP CF MFTT
UIBO UIF BWFSBHF ZFBSMZ IJTUPSJD SFUVSO GPS UIF TZTUFN

/PX
CBTFE PO POF PG UIF NFUIPET NFOUJPOFE FBSMJFS
ZPV OFFE UP
EFUFSNJOF UIF NBYJNVN ESBXEPXO ZPV BSF XJMMJOH UP TVTUBJO 0ODF ZPV
EFUFSNJOF UIJT WBMVF
ZPV XJMM OFFE UP LFFQ UIF ESBXEPXO TQSFBETIFFU GPS
ZPVS USBEJOH TZTUFN *O TPNF DBTFT
ZPVS USBEJOH QMBUGPSN XJMM IBWF UIJT
JOGPSNBUJPO
PS ZPV DBO KVTU HP UP XXX USBEFSTDIPJDFPQUJPOT OFU BOE VTF
the spreadsheet there.

*G ZPVS TUSBUFHZ FYDFFET UIF NBYJNVN ESBXEPXO UIBU ZPV BSF XJMMJOH
UP TVTUBJO PO UIF BDDPVOU
ZPV TIPVME IBMU USBEJOH BOE CFHJO UP SFFWBMVBUF
the system.

0ODF UIJT IBQQFOT
ZPV TIPVME FWBMVBUF UIF NBSLFU DPOEJUJPOT
FWBMV
BUF ZPVS TUSBUFHZ
NBLF BOZ OFDFTTBSZ NPEJåDBUJPOT
BOE QPTTJCMZ TUBSU
USBEJOH BHBJO XJUI B TNBMMFS QPTJUJPO TJ[F JG ZPV GFFM UIBU JT BQQSPQSJBUF

"T ZPV DBO TFF
UIJT JT B QSPBDUJWF BQQSPBDI SBUIFS UIBO B SFBDUJWF
BQQSPBDI "OE JU TIPVME EFUFS ZPV GSPN CMPXJOH VQ ZPVS BDDPVOU EVF UP
OFHBUJWF FNPUJPOT

CONSECUTIVE LOSING TRADES

" ESBXEPXO JT B HSFBU XBZ UP LOPX XIFO UP DVU PGG BOE SFFWBMVBUF B USBE
JOH TZTUFN 5IF QSPCMFN JT UIBU JU T B CJU DPNQMFY BOE DFSUBJO USBEFST XJMM
OPU XBOU UP USBDL UIF ESBXEPXO 5IFSF BSF B GFX TJNQMFS XBZT
POF PG
XIJDI JT TJNQMZ USBDLJOH UIF OVNCFS PG DPOTFDVUJWF MPTJOH USBEFT

5IF JEFB IFSF JT GBJSMZ TJNQMF *O ZPVS CBDLĄUFTUJOH IJTUPSJDBM EBUB
DIFDL
EFUFSNJOF IPX NBOZ MPTJOH USBEFT ZPV IBE JO B SPX 0ODF ZPV

216 BINARY OPTIONS

HFU UIJT OVNCFS
NVMUJQMZ JU CZ BOZXIFSF CFUXFFO BOE
EFQFOEJOH
PO ZPVS SJTL UPMFSBODF 8IBUFWFS åHVSF ZPV HFU
UIBU JT ZPVS UPMFSBODF GPS
NBYJNVN DPOTFDVUJWF MPTJOH USBEFT *G UIJT OVNCFS JT CSFBDIFE
ZPV XJMM
XBOU UP DVU BOE SFFWBMVBUF ZPVS USBEJOH TZTUFN JG OPU
ZPV DBO DPOUJOVF
trading.

-FU T HP PWFS B TJNQMF FYBNQMF -FU T BTTVNF UIBU ZPVS CBDLĄUFTUJOH
SFTVMUT TIPX ZPV UIF NBYJNVN OVNCFS PG TFWFO DPOTFDVUJWF MPTJOH USBEFT
:PV DBO EFDJEF UP NVMUJQMZ UIJT OVNCFS CZ UP HFU BOE TFU UIJT BT ZPVS
SFFWBMVBUJPO QPJOU 8IFO ZPV TUBSU USBEJOH ZPVS TZTUFN JO B MJWF BDDPVOU

JG ZPV IJU DPOTFDVUJWF MPTJOH USBEFT
ZPV XJMM IBWF UP TUPQ USBEJOH BOE
SFFWBMVBUF ZPVS TZTUFN

5IF LFZ IFSF JT OPU TP NVDI XIBU OVNCFS UP NVMUJQMZ UIF IJTUPSJD PS
CBDLĄUFTUFE DPOTFDVUJWF MPTJOH USBEFT CZ SBUIFS
UIF LFZ JT UP QSFEFUFSNJOF
UIJT OVNCFS CFGPSF ZPV TUBSU USBEJOH 5IJT XJMM UBLF OFHBUJWF FNPUJPOT PVU
PG UIF FRVBUJPO

0OF OFHBUJWF BTQFDU PG UIF DPOTFDVUJWF USBEF DVUPGG JT UIBU MPTT NBH
OJUVEF JT DPNQMFUFMZ UBLFO PVU PG UIF FRVBUJPO 8JUI UIF DPOTFDVUJWF
USBEF DVUPGG BQQSPBDI
ZPV EPO U UBLF JOUP BDDPVOU IPX NVDI ZPV MPTF PO
B USBEF 4P
GPS FYBNQMF
JG ZPV IBWF B DVUPGG QPJOU PG USBEFT BOE ZPV
MPTF QFSDFOU PG ZPVS BDDPVOU PO UIF TFDPOE DPOTFDVUJWF MPTJOH USBEF

ZPV XPVME OFFE BOPUIFS USBEFT UP EFUFSNJOF UIBU ZPV OFFE UP TUPQ BOE
SFFWBMVBUF ZPVS TZTUFN 0G DPVSTF
CJOBSZ PQUJPOT IFMQ IFSF
BT UIF DPMMBU
FSBM UIBU ZPV QVU VQ PO FBDI USBEF BDUT BT B OBUVSBM TUPQĄMPTT
XIJDI QSF
WFOUT ZPV GSPN MFUUJOH USBEFT HP FYUSFNFMZ GBS BHBJOTU ZPV JG ZPV NBOBHF
your position size properly.

" HPPE JEFB NBZ CF UP VTF B DPNCJOBUJPO PG UIF ESBXEPXO BQQSPBDI
BOE NBY DPOTFDVUJWF USBEF BQQSPBDI 5IJT XBZ
ZPV BSF QSPUFDUFE GSPN
CPUI TDFOBSJPT B GFX IVHF MPTJOH USBEFT BOE TFWFSBM TNBMM MPTJOH USBEFT
JO B SPX 0G DPVSTF
XJUI UIJT BQQSPBDI UIFSF JT B MJUUMF NPSF XPSL GPS ZPV

BT ZPV IBWF UP LFFQ USBDL PG CPUI UIF ESBXEPXO BOE DPOTFDVUJWF MPTJOH
trades while trading your system.

REINVESTMENT RATE

"OPUIFS JNQPSUBOU DPNQPOFOU PG NPOFZ NBOBHFNFOU JT UIF SFJOWFTUNFOU
SBUF 5IJT CBTJDBMMZ NFBOT IPX NVDI PG ZPVS USBEJOH QSPåUT ZPV XBOU UP
QMVH CBDL JOUP ZPVS TZTUFN

4PNF QFPQMF UBLF B QPSUJPO PG UIFJS QSPåUT PVU GSPN UIFJS USBEJOH FWFSZ
NPOUI 4PNFUJNFT QFPQMF FWFO UBLF PVU B QPSUJPO PG UIF QSPåUT GSPN FWFSZ
XJOOJOH USBEF 5IJT JT OPU B HPPE JEFB GPS NBOZ SFBTPOT 5IF UXP NPTU
JNQPSUBOU POFT BSF BT GPMMPXT 'JSTU
EFQFOEJOH PO UIF NPOFZ UIBU ZPV
NBLF GSPN USBEJOH UP MJWF PO JT WFSZ EBOHFSPVT *G ZPV BSF BO JOFYQFSJFODFE

Proactive System Improvement 217

USBEFS BOE ZPV EFQFOE PO UIF NPOFZ ZPV NBLF GSPN USBEJOH UP MJWF PO

UIF OFHBUJWF FNPUJPOT PG HSFFE BOE GFBS XJMM BMNPTU DFSUBJOMZ FBU ZPV BMJWF
"OPUIFS LFZ DPNQPOFOU IFSF JT UIBU XIFO ZPV MPTF
ZPV FTTFOUJBMMZ iLFFQw
QFSDFOU PG ZPVS MPTT *G ZPV IBWF B TZTUFN XIFSF ZPV BSF SFJOWFTUJOH
POMZ QFSDFOU PG ZPVS XJOT BOE MPTJOH QFSDFOU PG ZPVS MPTTFT
ZPV BSF
also pretty much doomed.

5IJT BMTP XPSLT XJUI MPTJOH NPOUIT *G ZPV BSF UBLJOH PVU QFSDFOU PG
ZPVS QSPåUT PO MPTJOH NPOUIT BOE ZFU JODVSSJOH QFSDFOU PG ZPVS MPTTFT

UIFO ZPV BSF GBDJOH B NBKPS VQIJMM CBUUMF -FU T MPPL BU TPNF OVNCFST UP
ESJWF UIJT DPODFQU IPNF

-FU T UBLF BO FYBNQMF PG USBEJOH XJUI B
BDDPVOU -FU T TBZ ZPV
IBWF B TBNQMF PG USBEFT 0O FBDI XJOOJOH USBEF ZPV NBLF
PO
FBDI MPTJOH USBEF ZPV MPTF
BOE ZPV IBWF B QFSDFOU TVDDFTT SBUF
5IJT TPVOET MJLF B HPPE TZTUFN 0WFS B MBSHF TBNQMF TJ[F
ZPV TIPVME IBWF
BQQSPYJNBUFMZ UIF TBNF OVNCFS PG XJOOJOH BOE MPTJOH USBEFT
BOE ZPVS
FYQFDUBODZ TIPVME CF PO FBDI USBEF

<
o
>

4P PWFS UIF USBEFT
JEFBMMZ ZPV TIPVME IBWF XJOOJOH USBEFT
MPT
JOH USBEFT
BOE NBLF
PO ZPVS XJOOFST BOE MPTF
PO ZPVS MPT
FST
HJWJOH ZPV
JO QSPåU XIJDI JT
CZ UIF XBZ
¨
KVTU UP TIPX
ZPV IPX FYQFDUBODZ XPSLT
/PU CBE
ZPV TBZ 8FMM
IFSF JT UIF JTTVF 5IF
USBEFT BSF OPU EJTUSJCVUFE FWFOMZ
NFBOJOH ZPV XJMM OPU IBWF POF XJOOFS UIFO
POF MPTFS
UIFO BOPUIFS XJOOFS BOE BOPUIFS MPTFS 'PS BMM ZPV LOPX
ZPV DBO
IBWF ZPVS åSTU USBEFT XJOOFST BOE ZPVS OFYU USBEFT MPTFST

5IF QSPCMFN XJUI UIJT JT UIBU CZ UBLJOH NPOFZ PVU
ZPV JODSFBTF ZPVS
DIBODFT PG HPJOH CVTU BOE JODSFBTJOH ZPVS ESBXEPXOT 5P NBLF UIJT ESB
NBUJD
MFU T MPPL BU IPX ZPV HP CVTU RVJDLFS CZ UBLJOH NPOFZ PVU PG B TZT
UFN -FU T TBZ ZPVS åSTU USBEFT BSF XJOOFST 5IJT NFBOT UIBU ZPV FBSO

¨



Example 1

5BLF
PVU
MFBWJOH ZPV XJUI
JO UIF BDDPVOU -FU T TBZ ZPVS OFYU
USBEFT MPTF ¨
5IJT MFBWFT ZPV CSPLF BOE PVU PG UIF
TZTUFN XJUI POMZ B OJDF XBUDI UIBU ZPV CPVHIU GPS UIF
ZPV UPPL PVU
*G UIF SFNBJOJOH USBEFT TUBZFE PO QBDF GPS UIF Ą SBUJP
ZPV XPVME IBWF
XJOOFST BOE MPTFST *G ZPV SFJOWFTUFE ZPVS QSPåUT BU QFSDFOU‰JO
PUIFS XPSET
LFQU UIFN JO UIF TZTUFN‰ZPV XPVME IBWF TUBZFE BMJWF BOE
CFFO BCMF UP UBLF QSPåU GSPN UIF TZTUFN BU UIF FOE

"OPUIFS SFBTPO UP SFJOWFTU ZPVS QSPåUT JT UIF QPXFS PG DPNQPVOEJOH
*G ZPV SFJOWFTU ZPVS QSPåUT
ZPVS BDDPVOU XJMM HSPX BOE ZPV XJMM CF BCMF UP

218 BINARY OPTIONS

USBEF CJHHFS MPU TJ[FT 'PS FYBNQMF
DPNQPVOEFE BOOVBMMZ GPS FJHIU
ZFBST BU QFSDFOU UVSOT JOUP


:FT
ZPV DPVME SVO JOUP JTTVFT XJUI ZPVS USBEFT CFJOH EJTUSJCVUFE VOF
WFOMZ BOE NPTU PG ZPVS MPTJOH USBEFT DPNJOH BU UIF FOE XIFO ZPVS QPTJUJPOT
BSF CJHHFS
CVU UIBU T XIBU ESBXEPXO BOBMZTJT JT GPS BOE UIBU T XIFO B HPPE
USBEFS XJMM LOPX UP XBML BXBZ GSPN B TZTUFN
UBLF IJT TUPQ MPTT
BOE TUBSU
MPPLJOH GPS BOPUIFS FEHF UP UFTU PVU BOE QPTTJCMZ VTF

4P IPX EP ZPV BDUVBMMZ SFBQ UIF åOBODJBM SFXBSE GSPN B USBEJOH TZTUFN
PS TUSBUFHZ )FSF JT POF QSBDUJDBM XBZ

*U NBZ CF B HPPE JEFB UP MPPL BU B USBEJOH TZTUFN MJLF B TUPDL 4FU ZPVS
IPMEJOH QFSJPE VQ GSPOU
EFUFSNJOF ZPVS NBYJNVN TVTUBJOBCMF ESBXEPXO
BOE
LFFQ USBDL PG UIF QPSUGPMJP FRVJUZ HSBQI BT ZPV USBEF BOE LFFQ ZPVS BDDPVOUJOH

:PV TIPVME LOPX JO BEWBODF UIBU JG UIF TZTUFN IBT B ESBXEPXO HSFBUFS
UIBO 9 QFSDFOU GSPN B OFU FRVJUZ IJHI
ZPV XJMM TUPQ USBEJOH JU BOE FJUIFS
UBLF ZPVS QSPåUT GSPN UIF TZTUFN PS DVU ZPVS MPTTFT

:PV DBO CBTJDBMMZ VTF UIF NBYJNVN ESBXEPXO DVUPGGG BT ZPV TFU UIF
BHHSFHBUF USBJMJOH TUPQ MPTT GPS ZPVS FOUJSF TZTUFN 3FNFNCFS UIBU BMM ESBX
EPXOT BSF DBMDVMBUFE GSPN B OFU FRVJUZ IJHI 4P ZPVS TZTUFN DBO NBLF B
UPO PG NPOFZ
UIFO IJU UIF NBY ESBXEPXO DVUPGG
XIJDI XPVME DBVTF ZPV
UP TUPQ USBEJOH JU
BOE ZPV DBO XBML BXBZ XJUI B QSPåU

-FU T MPPL BU BO FYBNQMF UP JMMVTUSBUF UIJT QPJOU

Example 2

-FU T BTTVNF UIBU ZPV TUBSU XJUI B
BDDPVOU BOE ZPV TFU ZPVS NBYJ
NVN TVTUBJOBCMF ESBXEPXO UP QFSDFOU

-FU T BTTVNF UIBU PWFS UIF åSTU USBEFT ZPV NBLF B QSPåU PG

5IJT XJMM HJWF ZPV B UPUBM BDDPVOU CBMBODF PG
/PX MFU T TBZ UIBU
PWFS UIF OFYU USBEFT ZPV IJU B TFSJFT PG MPTTFT BOE MPTF


'PSUZ UIPVTBOE EPMMBST JT QFSDFOU PG

XIJDI NFBOT UIBU ZPV
OFFE UP TUPQ USBEJOH ZPVS TZTUFN "T ZPV DBO TFF
ZPV TUJMM DPNF PVU

BIFBE /PX ZPV DBO QPDLFU UIF
BOE MPPL GPS PUIFS FEHFT PS B WBSJ
BUJPO PG UIF TZTUFN UIBU ZPV XFSF KVTU USBEJOH JO UIF NBSLFU

&YIJCJU JT B UBCMF EFQJDUJOH B USBEFS TUBSUJOH XJUI
BOE ESJW
JOH IJT IFS BDDPVOU BMM UIF XBZ VQ UP
CFGPSF UIF NBY ESBXEPXO DVU
PGG LJDLT JO BOE GPSDFT IJN IFS PVU PG UIF TZTUFN "T ZPV DBO TFF
UIF USBEFS
TUJMM NBLFT

B QFSDFOU SFUVSO
FWFO BGUFS UIF NBY ESBXEPXO DVUPGG

*O BEEJUJPO UP IBWJOH B NBY ESBXEPXO DVUPGG
ZPV OFFE UP EFUFSNJOF JO
BEWBODF XIFO ZPV XJMM åOBMMZ UBLF UIF QSPåUT PG UIF TZTUFN BOE SFFWBMVBUF
JG JU JT EPJOH XFMM "GUFS BMM
ZPV BSF USBEJOH UP NBLF NPOFZ

*G ZPV BSF EFQFOEJOH PO UIF NPOFZ GSPN USBEJOH UP MJWF PO
ZPV NBZ
XBOU UP TFU B TQFDJåFE QFSDFOUBHF SFUVSO PO ZPVS JOWFTUNFOU 0ODF ZPV
SFBDI ZPVS HPBM
ZPV DBO TUPQ USBEJOH BMUPHFUIFS BOE UBLF UIF NPOFZ ZPV

Proactive System Improvement 219

EXHIBIT 15.3 Max Drawdown Cutoff Example

Trade Max $ % Net Profit Net
# Trade P/L Balance Drawdown Drawdown $ Profit %

0 $ 100,000 $ 100,000 $ ‐ 0.0% $ 20,000 20%
1 $ 20,000 $ 120,000 $ 120,000 $ ‐ 0.0% $ 50,000 50%
2 $ 30,000 $ 150,000 $ 150,000 $ ‐ 0.0% $ 75,000 75%
3 $ 25,000 $ 175,000 $ 175,000 $ ‐ 0.0% $ 100,000 100%
4 $ 25,000 $ 200,000 $ 200,000 $ ‐ 0.0% $ 90,000 90%
5 $ (10,000) $ 190,000 $ 200,000 $ 10,000 5.0% $ 70,000 70%
6 $ (20,000) $ 170,000 $ 200,000 $ 30,000 15.0% $ 60,000 60%
7 $ (10,000) $ 160,000 $ 200,000 $ 40,000 20.0%

OFFE PVU BOE UIFO EFDJEF XIFUIFS UP TUBSU USBEJOH UIJT TZTUFN PS B WBSJBUJPO
PG JU GSPN UIF CFHJOOJOH

0G DPVSTF
ZPV TIPVME LFFQ USBDL PG IPX ZPV QFSGPSN PO BMM PG ZPVS
TZTUFNT
BOE ZPV TIPVME DPNQBSF BOE DPOUSBTU UP åOE XIBU XPSLT CFTU GPS
ZPV .BOZ CPPLT SFDPNNFOE FWBMVBUJOH FBDI PG ZPVS USBEFT 5IBU NBZ HFU
UPP UJNF DPOTVNJOH JO UIF QSBDUJDBM XPSME " NVDI CFUUFS BQQSPBDI JT UP
TJNQMZ FWBMVBUF FBDI GPS UIF USBEJOH TZTUFNT UIBU ZPV IBWF

:PV BMTP NBZ EFDJEF UP USBEF B TZTUFN GPS B DFSUBJO QFSJPE PG UJNF
TUPQ
USBEJOH JU BGUFS UIBU UJNF
BOE UBLF PVU ZPVS CBMBODF SFHBSEMFTT PG XIFUIFS
ZPV BSF VQ PS EPXO 0ODF ZPVS IPMEJOH QFSJPE FYQJSFT
ZPV DBO DPOTJEFS
UIF PSJHJOBM TZTUFN USBEF PWFS /PX
CBTFE PO UIF BDUVBM MJWF QFSGPSNBODF
BOE BOBMZTJT
JU JT VQ UP ZPV UP EFDJEF XIFUIFS UP FOUFS UIF TBNF TZTUFN
BHBJO PS UP MPPL GPS BOPUIFS FEHF

0ODF ZPV EP IJU ZPVS QSPåU UBSHFU
ZPV NBZ BMTP DPOTJEFS BO BHHSFHBUF
USBJMJOH TUPQ BQQSPBDI 5IJT XJMM IFMQ ZPV TRVFF[F BMM UIF MBTU KVJDFT PVU PG B
USBEJOH TZTUFN CFGPSF ZPV åOBMMZ TUPQ 5P EP UIJT ZPV XPVME TJNQMZ UJHIUFO
VQ ZPVS DVUPGG QBSBNFUFST BOE MFU UIF TZTUFN SVO 'PS FYBNQMF
JG ZPV IBE B
NBY ESBXEPXO UPMFSBODF PG QFSDFOU
ZPV NBZ EFDJEF UP ESPQ JU EPXO UP
QFSDFOU 5IJT XBZ
JG UIF TZTUFN LFFQT PO XJOOJOH
ZPV XJMM MPDL JO NPSF
BOE NPSF QSPåUT "OE JG JU HPFT BHBJOTU ZPV
ZPV XJMM DVU UIF TZTUFN RVJDLFS

XIJDI XJMM BMMPX ZPV UP LFFQ NPSF PG XIBU ZPV NBEF

5IF NBJO UIFNF IFSF JT UIBU UIF QSFTFU DPNNJUNFOU UP B TZTUFN JT DSJUJ
DBM UP B USBEFS T TVDDFTT .BOZ UJNFT USBEFST XJMM XBML BXBZ GSPN B TZTUFN
BOE HJWF VQ CFDBVTF PG B ESBXEPXO PS DPME TUSFBL XIFO UIF TZTUFN DPVME JO
GBDU IBWF CFFO TVDDFTTGVM *U JT JNQFSBUJWF UP TVDDFTT UIBU UIF DPNNJUNFOU CF
UIFSF
BT XFMM BT UIF DVUPGG BHHSFHBUF QPSUGPMJP TUPQĄMPTT JO QMBDF
TP ZPV LOPX
XIFO UP SFFWBMVBUF BOE PS HJWF VQ PO B TZTUFN BOE XIFO UP TUJDL XJUI JU

#FJOH BCMF UP TQPU FEHFT JT QBSU BSU
QBSU TDJFODF
BOE QBSU FEVDBUJPO
CVU
TUJDLJOH XJUI UIF SVMFT PG UIF TZTUFN BOE GPMMPXJOH UIFN BT EFTDSJCFE FBSMJFS
PS XJUI ZPVS PXO NPEJåDBUJPOT JT FTTFOUJBM GPS TZTUFN USBEJOH TVDDFTT

220 BINARY OPTIONS

DIVERSIFICATION AND ACCOUNT DISTRIBUTION

%JWFSTJåDBUJPO JT BOPUIFS FTTFOUJBM DPNQPOFOU UP UIF MPOHFWJUZ BOE TVD
DFTT PG B TZTUFN USBEFS %JWFSTJåDBUJPO FYJTUT BNPOH TZTUFNT BOE XJUIJO B
TZTUFN 'PS FYBNQMF
ZPV NBZ XBOU UP CF USBEJOH NVMUJQMF USBEJOH TZTUFNT
BU UIF TBNF UJNF "OE XJUIJO FBDI USBEJOH TZTUFN ZPV NBZ XBOU UP USBEF
multiple trading instruments.

INTERSYSTEM DIVERSIFICATION

*G ZPV BSF USBEJOH POMZ POF TZTUFN BOE JU TUBSUT UP HP BHBJOTU ZPV
ZPV XJMM
PCWJPVTMZ CF MPTJOH NPOFZ
BOE JU XJMM IBWF B HSFBUFS OFHBUJWF JNQBDU PO ZPVS
QTZDIPMPHJDBM BOE NFOUBM TUBUF *G ZPV IBWF UISFF BDUJWF TZTUFNT BOE POF TUBSUT
QFSGPSNJOH QPPSMZ
POF EPFT PLBZ
BOE POF EPFT WFSZ XFMM
ZPV BSF TUJMM PLBZ

:PV NBZ XBOU UP EJWFSTJGZ BNPOH BTTFU DMBTTFT MJLF TUPDLT
GVUVSFT
PQ
UJPOT
DVSSFODZ
BOE NPSF *U JT CFTU UP USBEF FBDI TZTUFN JO B TFQBSBUF BDDPVOU
5IJT XBZ
UIFSF JT OP DPOGVTJPO XIFO USBDLJOH QFSGPSNBODF BOE ESBXEPXO

*U JT BMTP JNQPSUBOU UIBU FBDI PG UIF TZTUFNT UIBU ZPV BSF USBEJOH JT
DPNQBUJCMF XJUI B TQFDJåD UZQF PG NBSLFU 'PS FYBNQMF
POF TUSBUFHZ DBO
CF NPSF PG BO PWFSCPVHIU
PWFSTPME TUSBUFHZ MJLF B $$* BQQSPBDI
BOE UIF
PUIFS POF DBO CF NPSF PG B USFOE GPMMPXJOH TUSBUFHZ MJLF B NPWJOH BWFS
BHF TZTUFN *G CPUI TZTUFNT CBDLĄUFTU XFMM PWFS B SPCVTU BOE TVGåDJFOU
TBNQMF TJ[F
ZPV TIPVME IPQF GPS UIFN UP CF TVDDFTTGVM 5IJT XBZ
JG UIF
NBSLFU TUBSUT UP USFOE
ZPVS USFOEĄGPMMPXJOH TZTUFN XJMM EP XFMM
XIJMF UIF
SBOHF TZTUFN EPFT OPU HJWF VQ UPP NVDI PG ZPVS XJOOJOHT *G UIF NBSLFU
HFUT JOUP B SBOHF
UIFO ZPV TIPVME IPQF GPS UIF PQQPTJUF UP IBQQFO

0G DPVSTF
ZPV TIPVME TUJMM IBWF UIF NBYJNVN ESBXEPXO BOE DVUPGG
QPJOUT GPS FBDI TZTUFN TFQBSBUFMZ 5IJT XBZ
JG BOZ TZTUFN CSFBLT
ZPV DBO
TUPQ USBEJOH JU CBTFE PO ZPVS QSFEFUFSNJOFE DSJUFSJB 4FF &YIJCJU

System 1

System 2

EXHIBIT 15.4 Multisystem Trading Graph

Proactive System Improvement 221

ACCOUNT BREAKDOWN

" OPUIFS DSJUJDBM JTTVF BCPVU TZTUFNT JT UIBU B TZTUFN XJUI B IJHIFS IJT
toric drawdown should not be as well capitalized as a system with a lower
ESBXEPXO 5IJT TFFNT TJNQMF
CVU UIF POF DPVOUFSJOUVJUJWF DPODFQU IFSF
JT UIBU UIF TZTUFN XJUI UIF IJHIFS ESBXEPXO XJMM VTVBMMZ IBWF B IJHIFS
CBDLĄUFTUFE QSPå U UP HP XJUI JU
BOE UIF TZTUFN XJUI UIF MPXFS ESBXEPXO
XJMM IBWF B MPXFS CBDLĄUFTUFE QSPå U " MPU PG QFPQMF XPVME UBLF UIF TZTUFN
UIBU UFTUT GPS B CFUUFS QSPå U BOE QVU NPSF NPOFZ JO JU

% SBXEPXO BOE FYQFDUBODZ BSF GBS NPSF JNQPSUBOU TUBUJTUJDT JO TZTUFN
SFTVMUT UIBO TJNQMF QSPå U :PV NBZ XBOU UP DPOTJEFS B QZSBNJE BQQSPBDI

meaning more money goes into the more stable systems that generate lower
SFUVSOT BOE IBWF MPXFS ESBXEPXOT 4NBMMFS DBQJUBM TIPVME CF BMMPDBUFE UP UIF
NPSF BHHSFTTJWF TZTUFNT UIBU IBWF IJHIFS QPUFOUJBM SFUVSOT CVU BMTP IBWF IJHI
FS ESBXEPXOT 5IJT JT B HPPE NFUIPE PG DBQJUBM QSFTFSWBUJPO 4FF &YIJCJU

High Volatility

Medium
Volatility

Low Volatility

EXHIBIT 15.5 Pyramid Collateralization of Trading Systems

KEY POINTS: PART 6

To take a quiz on this section, simply visit our companion education site,
www.traderschoiceoptions.net.

t Over time, trading edges tend to disappear, leading to systems becoming
ineffective.

t In order to remain profitable, it is essential to be on the lookout for proac-
tive changes to your system that could make it more effective. Reactive
changes should generally be avoided.

t One way of determining when to stop using a trading system is by decid-
ing on a maximum acceptable drawdown (dependent on the returns you
are seeking) and then ceasing to use the system if it results in a drawdown
exceeding that maximum value.

222 BINARY OPTIONS

t Another way of determining when to stop using a trading system is by
selecting an acceptable number of consecutive losing days (based on how
much risk you are willing to carry), which, if exceeded, will determine that
your system must be reevaluated.

t Regularly taking profits from your trading portfolio rather than reinvesting
is detrimental because it both results in your portfolio’s gaining a higher
percent of losses than profits and prevents your money from compound-
ing and growing over time.

t One way to take profits from trading is to wait until drawdowns exceed
allowable levels, then cease to use your trading system and take profits.

t Another way is by trading with a system for a set period of time and at
the end of that period shutting down the system and taking the balance,
regardless of profit or loss.

t One last way (and most useful if you rely on trading returns to live on) is to
decide on how much profit you seek and shutting down the system when
that level is reached.

t Diversification is essential in trading, both in using diverse trading sys-
tems and in trading diverse instruments.

t It is best to have systems with higher historical drawdowns less well capi-
talized and vice versa.

Binary Options: Strategies for Directional and Volatility Trading. Alex Nekritin.
© 2013 Alex Nekritin. Published 2013 by John Wiley & Sons, Inc.

PART VII

Profiting with
Volatility

T his section will give you all the tools you need to help you build a
volatility short trading strategy.
What You Will Learn:
t 8IBU JT QSFNJVN DPMMFDUJPO
t 8 IBU BSF UIF BEWBOUBHFT BOE EJTBEWBOUBHFT PG TFMMJOH WPMBUJMJUZ
t 8IBU BSF UIF LFZ DPNQPOFOUT UP B WPMBUJMJUZ TIPSU USBEJOH TZTUFN
t )PX DBO ZPV QVU FWFSZUIJOH ZPV MFBSOFE UPHFUIFS JOUP BO FGGFDUJWF

WPMBUJMJUZ TIPSU USBEJOH TZTUFN
8 IFO ZPV DPNQMFUF UIJT TFDUJPO ZPV XJMM CF BSNFE XJUI B QPXFSGVM
binary options trading strategy.

223

Binary Options: Strategies for Directional and Volatility Trading. Alex Nekritin.
© 2013 Alex Nekritin. Published 2013 by John Wiley & Sons, Inc.

CHAPTER 16

The Volatility
Short Trading

Rules

T IFSF BSF UIPVTBOET
JG OPU IVOESFET PG UIPVTBOET
PG CPPLT BOE
DPVSTFT BWBJMBCMF UIBU UFBDI WBSJPVT USBEJOH TUSBUFHJFT .BOZ PG UIFTF
TUSBUFHJFT BSF UFDIOJDBM BOE TPNF BSF GVOEBNFOUBM 5IF QVSQPTF PG
UIJT CPPL JT UP HFU ZPV DPNGPSUBCMF XJUI CJOBSZ PQUJPOT TP UIBU ZPV DBO VTF
UIFN UPHFUIFS XJUI WBSJPVT UFDIOJDBM BOE GVOEBNFOUBM TUSBUFHJFT

5IFSF JT OP QFSGFDU TUSBUFHZ GPS USBEJOH BOZ JOTUSVNFOU 4PNFUJNFT
FEHFT CFDPNF BWBJMBCMF BOE TVDDFTTGVM USBEFST TUBSU UP FYQMPJU UIFN VOUJM
UIFZ EJTBQQFBS 8JUI QSPQFS SJTL NBOBHFNFOU
USBEFST DBO UBLF BEWBOUBHF
PG DFSUBJO NBSLFU FEHFT GPS QFSJPET PG UJNF *U JT IJHIMZ VOMJLFMZ UIBU BOZPOF
XJMM FWFS TFMM ZPV PS UFMM ZPV UIF FYBDU SVMFT GPS UIFJS USBEJOH TZTUFN UIBU
JT WFSZ QSPå UBCMF &WFO JG UIFZ IBE B HSFBU TZTUFN
UIFZ XPVME NPTU MJLFMZ
QSFGFS UP USBEF JU SBUIFS UIBO TFMM JU PS XSJUF BCPVU JU JO B CPPL

1SFNJVN DPMMFDUJPO JT B TUSBUFHZ PG TQFDVMBUJOH PO BO VOEFSMZJOH JO
TUSVNFOU UP TUBZ XJUIJO B SBOHF %VSJOH IJHI WPMBUJMJUZ
ZPV BSF TQFDVMBUJOH
on its staying in a wider range, and during low volatility, you can speculate
PO OBSSPXFS SBOHFT 5IJT TUSBUFHZ JT GBJSMZ XJEFMZ VTFE XJUI WBOJMMB QVU
DBMM PQUJPOT 0OF PG UIF HSFBUFTU BQQFBMT PG UIJT TUSBUFHZ JT UIF QSJODJQMF
PG OPSNBM EJTUSJCVUJPO 5IF JEFB JT UIBU BOZ VOEFSMZJOH JOTUSVNFOU JT NPTU
MJLFMZ UP FOE VQ XIFSF JU TUBSUFE BGUFS BOZ QFSJPE PG UJNF CBTFE PO OPSNBM
distribution.

#JOBSZ PQUJPOT BMTP BMMPX ZPV UP DSFBUF B WPMBUJMJUZ TIPSU TZTUFN *O
UIJT TFDUJPO
XF XJMM HP PWFS TPNF CBTJD QSJODJQMFT UIBU ZPV DBO VTF UP DSF
BUF ZPVS PXO WPMBUJMJUZ TIPSU CJOBSZ PQUJPOT USBEJOH TZTUFN 1MFBTF LFFQ
JO NJOE UIBU UIFTF BSF POMZ QSJODJQMFT ZPV XJMM OFFE UP VTF UIFN UP QVU

225

226 BINARY OPTIONS

UPHFUIFS B TZTUFN GPS ZPVSTFMG CBTFE PO ZPVS EFTJSFE QSPåUT BOE SJTL UPMFS
BODF BOE QSFGFSSFE NFUIPE PG NBSLFU BOBMZTJT

PREMIUM COLLECTION

"DDPSEJOH UP UIF QSJODJQMF PG OPSNBM EJTUSJCVUJPO
XIFO ZPV FYJU B USBEF

UIF QSJDF PG BO JOTUSVNFOU JT NPTU MJLFMZ UP FOE VQ XIFSF JU XBT XIFO ZPV
entered your trade.

&YIJCJU JT BO JNBHF PG B OPSNBM EJTUSJCVUJPO DVSWF %VF UP UIF QSJO
DJQMF PG OPSNBM EJTUSJCVUJPO
UIF QSJDF PG B USBEBCMF JOTUSVNFOU IBT B IJHIFS
QSPCBCJMJUZ PG FWFOUVBMMZ FOEJOH VQ XIFSF JU TUBSUFE 5P HFU B SFBMJTUJD QJDUVSF
PG IPX NVDI UIF 4UBOEBSE 1PPS T 4 1
NPWFT JO B HJWFO EBZ PS XFFL
ZPV
DBO DIFDL PVU PVS EJTUSJCVUJPO UPPM PO XXX USBEFSTDIPJDFPQUJPOT OFU

US S&P 500

1235 1245 1256 1265

Normal Distribution Curve

EXHIBIT 16.1 Normal Distribution Curve

5IJT PCWJPVTMZ EPFT OPU NFBO UIBU UIF QSJDF XJMM BMXBZT FOE VQ XIFSF
JU TUBSUFE
CVU JU JT XIFSF UIF QSJDF IBT UIF IJHIFTU QSPCBCJMJUZ PG FOEJOH VQ

5IFSF JT B TUVEZ UIBU TVQQPSUT UIF OPSNBM EJTUSJCVUJPO UIFPSZ "DDPSEJOH
UP B $IJDBHP .FSDBOUJMF &YDIBOHF $.&
TUVEZ PG FYQJSJOH BOE FYFSDJTFE WB
OJMMB QVU DBMM PQUJPOT GPS UIF ZFBST

BOE
QFSDFOU PG BMM PVU
PG UIF NPOFZ PQUJPOT QVSDIBTFE FYQJSF XPSUIMFTT SBUIFS UIBO HFU FYFSDJTFE

/BUVSBMMZ
ZPV XPVME UIJOL UIBU TFMMJOH PQUJPOT JT UIF XBZ UP HP CBTFE
PO UIFTF OVNCFST )PXFWFS
UIJT HFUT B CJU USJDLZ TJODF XIFO ZPV BSF TFMMJOH
BO PVUĄPGĄUIFĄNPOFZ PQUJPO ZPV BSF POMZ QPDLFUJOH JUT TNBMM QSFNJVN
BOE
ZPVS MPTT DBO CF VOMJNJUFE XJUI WBOJMMB QVU DBMM PQUJPOT

Binary options can be slightly better when doing a volatility short
TQSFBE
TJODF ZPVS EPXOTJEF JT MJNJUFE JG ZPV IPME VOUJM FYQJSBUJPO #VU ZPV
BSF BMTP QJDLJOH VQ B TNBMM BNPVOU PO FBDI MFH BOE IBWF UIF QPUFOUJBM PG
MPTJOH NVDI NPSF

4P DBO B WPMBUJMJUZ TIPSU TUSBUFHZ XPSL *U JT QPTTJCMF CVU ZPV OFFE UP
IBWF DFSUBJO SVMFT JO NJOE XIFO USBEJOH JU

'JSTU
MFU T SFWJFX XIBU IBQQFOT JO B WPMBUJMJUZ TIPSU TUSBUFHZ 8IFO FO
UFSJOH B WPMBUJMJUZ TIPSU TQSFBE
ZPV BSF TQFDVMBUJOH PO UIF GBDU UIBU UIF
VOEFSMZJOH JOTUSVNFOU XJMM TUBZ JO B SBOHF *O PSEFS UP EP UIJT
ZPV XPVME
TFMM B EFFQĄJOĄUIFĄNPOFZ PQUJPO BOE CVZ B EFFQĄPVUĄPGĄUIFĄNPOFZ PQUJPO

The Volatility Short Trading Rules 227

&YIJCJU EFQJDUT UIF QSPåU BOE MPTT PG HPJOH MPOH B CJOBSZ PQUJPO
BOE TIPSU B CJOBSZ PQUJPO 5IF YĄBYJT SFQSFTFOUT UIF QSJDF PG UIF VOEFSMZ
JOH
BOE UIF ZĄBYJT SFQSFTFOUT UIF QSPåU BOE MPTT 1 -
*G BU FYQJSBUJPO UIF
underlying has closed below the short position or above long position, the
trader will profit.

300

200 In a short volatility This line represents the
trade, you profit

if the underlying price of the underlying

closes below your market.

100 short position or

above your long

position.

0

–100

–200

–300

Long Position Short Position

EXHIBIT 16.2 P&L Graph of a Long Volatility Trade

"T MPOH BT UIF QSJDF PG UIF VOEFSMZJOH TUBZT BCPWF UIF TUSJLF QSJDF PG UIF
DPOUSBDU UIBU ZPV QVSDIBTFE
ZPV XJMM FBSO NJOVT UIF QSFNJVN PG UIF
PQUJPO UIBU ZPV QVSDIBTFE "OE BT MPOH BT UIF QSJDF PG UIF VOEFSMZJOH TUBZT
CFMPX UIF QSFNJVN PG UIF PQUJPO UIBU ZPV TPME
ZPV XJMM FBSO UIF QSFNJVN
PO UIF PVUĄPGĄUIFĄNPOFZ PQUJPO UIBU ZPV TPME &TTFOUJBMMZ
ZPV XBOU UIF VO
derlying to stay in a range.

Trade Example

-FU T UBLF BOPUIFS MPPL BU BO FYBNQMF PG B WPMBUJMJUZ TIPSU USBEF BOE UIFO QSP
WJEF ZPV XJUI TPNF QPJOUFST JO PSEFS UP USBEF UIJT TUSBUFHZ NPSF FGGFDUJWFMZ

Rationale -FU T BTTVNF UIBU UIF NBSLFU QSJDF PG UIF 4 1 GVUVSFT 64

JT :PV TQFDVMBUF UIBU UIF 4 1 GVUVSFT XJMM SFNBJO JO B SBOHF
TUBZ
JOH BCPWF BOE CFMPX

Entry Breakdown *O PSEFS UP EP UIJT
ZPV EFDJEF UP TFMM POF DPOUSBDU
PG UIF 64 CJOBSZ PQUJPO GPS
BOE BMTP CVZ POF DPOUSBDU PG UIF
64 CJOBSZ PQUJPO GPS 5IF DPMMBUFSBM GPS UIJT USBEF JT

XIJDI JT UIF DPMMBUFSBM PG UIF MPOH QPTJUJPO

BEEFE UP UIF DPMMBUFSBM PG
UIF TIPSU QPTJUJPO
o

228 BINARY OPTIONS

Long Trade Logic 4JODF ZPV BSF BTTVNJOH UIBU UIF 4 1 GVUVSFT XJMM
TUBZ XJUIJO ZPVS EFTJSFE SBOHF
ZPV XPVME QVU VQ GPS UIF i w PQUJPO
BOE IPQF UIBU UIF QSJDF XPVME JOEFFE DMPTF HSFBUFS UIBO
XIJDI XPVME
HJWF ZPV B UPUBM QBZPVU PO UIF PQUJPO GPS B QPUFOUJBM QSPåU PG
QFS DPOUSBDU o


Short Trade Logic 8JUI UIF TIPSU QPTJUJPO
ZPV BSF BTTVNJOH UIBU UIF
VOEFSMZJOH XJMM TUBZ JO UIF EFTJSFE SBOHF BOE UIFSFGPSF JU XJMM OPU DSPTT
BCPWF 4P ZPV TFMM TIPSU TFMM
UIF i w PQUJPO :PV XPVME QVU VQ
JO DPMMBUFSBM UIJT JT UIF EJGGFSFODF CFUXFFO BOE UIF QSFNJVN
PG UIF PQUJPO ZPV TFMM
"T MPOH BT UIF NBSLFU EPFT OPU HP BCPWF
ZPV
XJMM SFDFJWF UIF TFUUMFNFOU PG
GPS B QSPåU PG o


Total Collateral :PVS UPUBM DPMMBUFSBM PO UIF TQSFBE JT 5IJT JT
PQUJPO QSFNJVN GPS UIF MPOH USBEF QMVT DPMMBUFSBM GPS UIF TIPSU USBEF
o


Exit Breakdown

Maximum Risk *G UIF 4 1 GVUVSFT NPWF PVUTJEF PG FJUIFS TUSJLF QSJDF
UIF
USBEFST XJMM MPTF 5IF DBMDVMBUJPOT GPS UIFTF OVNCFST BSF FYQMBJOFE MBUFS

8IFO HPJOH TIPSU WPMBUJMJUZ ZPV DBOOPU MPTF PO CPUI MFHT PG ZPVS QPTJ
UJPO BU UIF TBNF UJNF JG ZPV IPME VOUJM FYQJSBUJPO 5IF GVUVSFT DBOOPU CF
CPUI CFMPX BOE BCPWF BU UIF TBNF UJNF 5IFSFGPSF
ZPV IBWF UP
XJO PO BU MFBTU POF PG ZPVS QPTJUJPOT JG ZPV IPME VOUJM FYQJSBUJPO

Upper Strike Price Breach :PVS NBYJNVN SJTL JG UIF 4 1 GV
UVSFT DMPTF BCPWF BU FYQJSBUJPO JT FRVBM UP UIF HBJO GSPN UIF i w
PQUJPO UIBU ZPV CPVHIU NJOVT UIF MPTT PO UIF i w PQUJPO UIBU ZPV
TPME NJOVT FRVBMT B UPUBM MPTT PG

Lower Strike Price Breach :PVS NBYJNVN SJTL JG UIF 4 1 GV
UVSFT DMPTF CFMPX BU FYQJSBUJPO JT FRVBM UP UIF QSPåU UIBU ZPV UBLF
JO PO UIF i w PQUJPO NJOVT UIF MPTT UIBU ZPV XJMM JODVS XJUI UIF
i w PQUJPO 5IJT BMTP FRVBMT B UPUBM MPTT PG

/PX MFU T MPPL BU XIBU IBQQFOT JG UIF VOEFSMZJOH TUBZT CFUXFFO
BOE CZ FYQJSBUJPO

Maximum Reward *G UIF 64 TUBZT CFUXFFO BOE BU FY
QJSBUJPO
ZPVS DBTI JOýPX XPVME CF PO CPUI UIF MPOH BOE UIF TIPSU
PQUJPOT 4P ZPV XPVME DPMMFDU B UPUBM PG BU FYQJSBUJPO 5P åOE PVU ZPVS
QSPåU
TJNQMZ TVCUSBDU UIF DPMMBUFSBM UIBU ZPV QVU VQ GSPN ZPVS DBTI JOýPX
BU FYQJSBUJPO

The Volatility Short Trading Rules 229

"T ZPV SFDBMM
ZPVS UPUBM DPMMBUFSBM JT 4VCUSBDU UIBU OVNCFS GSPN
UIF SFWFOVF BU FYQJSBUJPO
BOE ZPV BSSJWF BU B NBYJNVN QSPåU PG

Reward Risk Ratio :PVS SFXBSE SJTL SBUJP PO UIJT USBEF JT TJNQMZ FRVBM
UP NBY QSPåU BU FYQJSBUJPO
EJWJEFE CZ NBY SJTL BU FYQJSBUJPO

PS *O PUIFS XPSET
ZPV BSF SJTLJOH GPS FWFSZ ZPV NBLF

&YIJCJU EFQJDUT UIF 1 - PG HPJOH MPOH UIF CJOBSZ PQUJPO BOE
TIPSU UIF CJOBSZ PQUJPO XIFO UIF VOEFSMZJOH JOTUSVNFOU JT USBEJOH BU
5IF YĄBYJT SFQSFTFOUT UIF QSJDF PG UIF VOEFSMZJOH
BOE UIF ZĄBYJT SFQ
SFTFOUT UIF 1 - *G BU FYQJSBUJPO UIF VOEFSMZJOH IBT DMPTFE CFMPX BOE
BCPWF
UIF USBEFS XJMM QSPåU

Profit 90 This line is a representation
of profit or loss in dollars.

60 This line represents
Potential Profit the price of the
underlying market.
on Trade:
(= $17) 30

Potential Loss 0 Strike Prices
on Trade:
(= $83) 1232 1235 1238 1241 1244 1247 1250 1253 1256 1259 1262 1265 1268

–30

–60 Current market
Loss –90 (= 1250)

EXHIBIT 16.3 P&L Graph of a Short Volatility Binary Option Trade

Summary &YIJCJU DPOUBJOT BMM PG UIF EBUB QPJOUT GPS UIJT USBEF

EXHIBIT 16.4 Data Points for Short Volatility Binary Option Trade

Trade Figure Calculation

Underlying asset S&P futures
Market price 1250
Expiration 1 day
Strike price long 1244
Strike price short 1256
Size long 1 contract
Size short 1 contract
Price Ask price of > 1244
contract: $93
Bid price of > 1256 (Continued)
contract: $10

230 BINARY OPTIONS

EXHIBIT 16.4 (Continued)

Trade Figure Calculation

Total collateral $183 (Ask price + ($100 – bid price))
× number of contracts = total
Max loss $83 collateral
($93 + ($100 – $10)) × 1 =
Max profit $17 ($93 + $90) × 1=
$183 × 1 = $183
Risk vs. reward 1:4.88 Higher of:
(collateral of short position – profit
of long position) × number of
contracts = max loss
(($100 – $10) – ($100 – $93)) × 1 =
($90 – $7) × 1 =
$83 × 1 = $83
Or
(collateral of long position – profit
of short position) × number of
contracts = max loss
($93 – $10) × 1 = $83 
Revenue – total collateral = max
profit
$200 – $183 = $17
Max profit / max loss = risk vs.
reward
$17 / $83 = 1:4.88

&YIJCJU EFQJDUT UIF NBYJNVN MPTT BOE NBYJNVN HBJO GPS FBDI MFH
PG UIF TIPSU WPMBUJMJUZ USBEF BCPWF 5IF MJHIU HSFZ TIBEFE BSFB SFQSFTFOUT
UIF NBYJNVN QSPåU GPS FBDI QPTJUJPO
BOE UIF EBSL HSFZ TIBEFE BSFB SFQSF
TFOUT UIF NBYJNVN MPTT GPS FBDI QPTJUJPO

*U T QSFUUZ DFSUBJO CZ OPX UIBU ZPV TFF UIF CJH JTTVF XJUI UIJT UZQF PG
TUSBUFHZ :PV BSF SJTLJOH EPMMBST GPS FWFSZ UIBU ZPV NBLF 4P UIF

Buy 1 @ 93 Sell 1 @ 10
100 100

75 75

50 50
25 25

00

EXHIBIT 16.5 Graphical Representation of the P&L on Both the Long and Short
Positions

The Volatility Short Trading Rules 231

LFZ UP TVDDFTT XJUI B QSFNJVN DPMMFDUJPO TUSBUFHZ JT UP åOE B XBZ UP NJUJ
HBUF UIF SJTL

-FU T MPPL BU TPNF XBZ UIBU ZPV DBO EP UIJT

RULE 1: CUT OFF YOUR LOSING TRADES

-FU T VTF &YIJCJU UP BOBMZ[F UIF NBHOJUVEF PG UIF QSJDF NPWFNFOU PG
4 1 GVUVSFT

&YIJCJU EFQJDUT UIF NBHOJUVEF PG XFFLMZ NPWFT CZ 4 1 GVUVSFT
*U TIPXT UIF QFSDFOUBHF PG UIF XFFLT EVSJOH FBDI PG UIF åWFĄZFBS JOUFS
WBMT UIBU UIF 4 1 GVUVSFT NPWFE CZ NPSF UIBO B DFSUBJO QFSDFOUBHF "
greater detailed interactive graph is available at www.traderschoiceop
tions.net.

'PS FYBNQMF
JG UIFSF XFSF USBEJOH EBZT BOE UIF 419 NPWFE CZ
NPSF UIBO QFSDFOU UJNFT
UIF UBCMF XPVME TIPX QFSDFOU

"T ZPV DBO TFF GSPN &YIJCJU
UIF 4 1 JOEFY NPWFE EPXO CZ NPSF
UIBO QFSDFOU QFSDFOU PG UIF UJNF BOE NPWFE VQ CZ NPSF UIBO
QFSDFOU QFSDFOU PG UIF UJNF *O UPUBM
UIF 4 1 GVUVSFT NPWFE CZ NPSF
UIBO QFSDFOU QFSDFOU PG UIF UJNF

5IJT NFBOT UIBU JG ZPV XFSF UP TQFDVMBUF UIBU UIF 4 1 GVUVSFT XJMM TUBZ
XJUIJO B SBOHF PG QFSDFOU BCPWF NBSLFU QSJDF BOE XJUIJO B QFSDFOU SBOHF
CFMPX NBSLFU QSJDF
ZPV XPVME CF DPSSFDU SPVHIMZ UISFF PVU PG GPVS UJNFT -FU T
EP B CBTJD DBMDVMBUJPO UP åHVSF PVU IPX NVDI ZPV OFFEFE UP NBLF PO ZPVS
XJOOJOH WPMBUJMJUZ TIPSU TQSFBET JO PSEFS UP DPNQFOTBUF GPS ZPVS MPTJOH TIPSU
spread.

)FSF JT UIF GPSNVMB GPS WPMBUJMJUZ TIPSU TQSFBE DPNQFOTBUJPO

XJOOJOH USBEFT
o MPTJOH USBEF


#BTFE PO UIJT GPSNVMB
ZPV DBO MPTF VQ UP UJNFT ZPVS QPUFOUJBM HBJO PO
XJOOJOH USBEFT PO ZPVS MPTJOH USBEFT BOE TUJMM CSFBL FWFO 4P JG ZPV XJO
PO ZPVS XJOOJOH USBEFT
ZPV DBO MPTF VQ UP PO ZPVS MPTJOH USBEFT

5IF JTTVF JT UIBU CBTFE PO UIF MBTU FYBNQMF BOE UIJT BQQSPBDI
UIF
BNPVOU UIBU ZPV XJMM DPMMFDU JO QSFNJVN PO UIF TQSFBET XJMM CF NVDI MFTT
UIBO POF UIJSE PG ZPVS NBYJNVN SJTL #BTFE PO UIF USBEF FYBNQMF QSPWJEFE
FBSMJFS
ZPVS SFXBSE SJTL SBUJP XBT *G ZPV XJO POMZ PO UISFF XJO
OJOH USBEFT BOE MPTF PO ZPVS POF MPTJOH USBEF
ZPV XJMM BDUVBMMZ FOE
VQ CFIJOE CZ

*O PSEFS UP BWPJE UIJT QJUGBMM
ZPV OFFE UP NBLF TVSF UIBU ZPV DBQ ZPVS
MPTT PO FBDI TQSFBE UP B TQFDJåD QFSDFOUBHF PG ZPVS XJO 5IF XBZ UP EP UIJT
JT OPU UP XBJU VOUJM FYQJSBUJPO JG UIF USBEF JT HPJOH BHBJOTU ZPV
CVU JOTUFBE
UP DVU UIF USBEF PGG

232

EXHIBIT 16.6 Weekly S&P 500 Futures, Five‐Year Intervals

–6+% –5% –4% –3% –2% 2% 3% 4% 5% 6+%

changes changes changes changes changes changes changes changes changes changes

1/9/2012 – # of weeks: 10 14 27 39 58 57 30 19 13 8
1/9/2007
percentage: 3.86% 5.41% 10.42% 15.06% 22.39% 22.01% 11.58% 7.34% 5.02% 3.09%
1/8/2007 – # of weeks: 2 3 5 10 28 26 11 4 2 1
1/8/2002
percentage: 0.78% 1.16% 1.94% 3.88% 10.85% 10.08% 4.26% 1.55% 0.78% 0.39%
1/7/2002 – # of weeks: 3 5 13 19 41 51 24 13 3 2
1/7/1997
percentage: 1.16% 1.94% 162.50% 7.36% 15.89% 19.77% 9.30% 5.04% 1.16% 0.78%
Total: # of weeks: 15 22 45 68 127 134 65 36 18 11
percentage:
1/7/1997 – 1.94% 2.84% 5.81% 8.77% 16.39% 17.29% 8.39% 4.65% 2.32% 1.42%
1/9/2012 0
Grand Total: 15 22 45 68 127 138 65 36 18 11
# of weeks: 1.71% 2.50% 5.12% 7.74% 14.45% 15.70% 7.39% 4.10% 2.05% 1.25%
percentage:

Note: Calculated only for five‐day and four‐day weeks. Open intervals (i.e., 3% changes = 3+%)

The Volatility Short Trading Rules 233

)FSF JT IPX ZPV XPVME EP UIJT -FU T BTTVNF UIBU CBTFE PO ZPVS BOBM
ZTJT PG IJTUPSJDBM EBUB ZPV EFDJEF UIBU ZPV BSF XJMMJOH UP MPTF OP NPSF
UIBO UISFF UJNFT XIBU ZPV TUBOE UP NBLF 4P JG ZPV TUBOE UP DPMMFDU B UP
UBM PG PO B WPMBUJMJUZ TIPSU TQSFBE
ZPV BSF XJMMJOH UP HJWF VQ OP NPSF
UIBO

-FU T VTF PVS QSFWJPVT FYBNQMF UP EJTDVTT IPX UP JNQMFNFOU UIJT TUSBU
FHZ "T ZPV LOPX
UIF USBEF DBO POMZ HP BHBJOTU ZPV JO POF EJSFDUJPO PS UIF
PUIFS 5IFSFGPSF
POF MFH PG ZPVS TQSFBE XJMM CF QPTJUJWF XIJMF UIF PUIFS MFH
will be negative.

5P SFJUFSBUF
ZPV TUBOE UP DPMMFDU PO ZPVS MPOH MFH BOE ZPV TUBOE UP
DPMMFDU PO ZPVS TIPSU MFH JG ZPV BSF DPSSFDU

Cutoff on the Long Leg Potential Breach

*G UIF QSJDF TUBSUT UP NBLF B TJHOJåDBOU NPWF UPXBSE UIF CPUUPN CBSSJFS PG
UIF SBOHF
ZPVS TIPSU PQUJPO XJMM CF åOF BOE ZPV XJMM MPDL JO UIBU
QSFNJVN 5IFSFGPSF
ZPV DBO MFBWF UIJT MFH BMPOF BOE XJMM OFFE UP GPDVT
PO ZPVS MPOH MFH *O PSEFS UP EP UIJT
BT UIF QSJDF JT NPWJOH EPXO
ZPV
TJNQMZ XBUDI UIF QSFNJVN VOUJM JU ESPQT CZ NPSF UIBO

5IF SFBTPO UIF OVNCFS JT BOE OPU JT UIBU ZPV BMSFBEZ TUBOE UP
DPMMFDU UIF PO UIF VQQFS MFH PG UIF TQSFBE 4P ZPV DBO MPTF PO
UIF MPXFS MFH BOE TUJMM IBWF POMZ B MPTT PO UIF FOUJSF TQSFBE

5IFSFGPSF
ZPV DBO TUBZ JO ZPVS USBEF VOUJM UIF CJE QSJDF PG UIF
PQUJPO HPFT CFMPX 5IJT JT DBMDVMBUFE CZ TVCUSBDUJOH GSPN UIF
QSFNJVN UIBU ZPV QBJE UP HFU JOUP UIF MPXFS MFH PG UIF TQSFBE

"T ZPV DBO TFF
UIF PQUJPO TUJMM OFFET UP NPWF RVJUF B XBZ BHBJOTU ZPV
JO PSEFS GPS ZPV UP IBWF UP DVU PGG
CVU UIJT XBZ ZPV TUJMM NBJOUBJO UIF OFFE
FE SFXBSE SJTL SBUJP

Cutoff on the Short Leg Potential Breach

-FU T BOBMZ[F IPX UIJT TDFOBSJP QMBZT PVU PO B QPUFOUJBM CSFBDI PG UIF
MPOH MFH *G UIF QSJDF PG UIF VOEFSMZJOH TUBSUT UP NPWF VQ BOE IFBET UP
XBSE UIF TUSJLF QSJDF
ZPV XJMM OFFE UP UIJOL BCPVU DVUUJOH UIF
PQUJPO IPXFWFS
ZPV TUBOE UP MPDL JO ZPVS QSPåU PO ZPVS
option.

"T ZPV SFDBMM
CBTFE PO PVS EFTJSFE SFXBSE SJTL SBUJP
ZPV EFDJEFE UIBU
ZPV BSF XJMMJOH UP HJWF VQ POMZ PO UIF FOUJSF TQSFBE UIJT JT UIF
QSFNJVN DPMMFDUFE NVMUJQMJFE CZ 4JODF ZPV TUBOE UP MPDL JO PO UIF
CPUUPN MFH
ZPV OFFE UP BEE UIJT OVNCFS UP JO PSEFS UP DBMDVMBUF
ZPVS NBYJNVN BDDFQUBCMF MPTT PO UIF QPTJUJPO #BTFE PO UIJT DBMDV
MBUJPO
ZPVS NBYJNVN BDDFQUBCMF MPTT PO UIF QPTJUJPO JT 4JODF
ZPV QVU VQ DPMMBUFSBM UP QPUFOUJBMMZ DPMMFDU ZPVS QSFNJVN
ZPV DBO

234 BINARY OPTIONS

XBJU VOUJM UIF BTL QSJDF PG UIF PQUJPO DMJNCT BMM UIF XBZ VQ UP
CFGPSF DVUUJOH ZPVS USBEF PGG

8IFO ZPV EP UIJT
ZPV XJMM MPTF PO ZPVS TIPSU USBEF BOE TUJMM HBJO
PO ZPVS MPOH USBEF
XIJDI XJMM HJWF ZPV B OFU MPTT FRVJWBMFOU UP ZPVS NBYJ
NVN UISFTIPME PG

5IFSF BSF B GFX UIJOHT UP LFFQ JO NJOE XIFO JNQMFNFOUJOH B DVUPGG
rule on a volatility short strategy. First, you do not want to calculate the
DVUPGG OVNCFS XJUI UIF JOUFOUJPO PG CSFBLJOH FWFO "GUFS BMM
ZPV BSF USBE
JOH UIF TZTUFN UP NBLF NPOFZ 4P XIFO ZPV EP ZPVS IJTUPSJDBM BOBMZTJT
BOE DBMDVMBUJPOT UP EFUFSNJOF ZPVS CSFBLFWFO DVUPGG NVMUJQMF
ZPV OFFE UP
NBLF UIF BDUVBM NVMUJQMF MPXFS UIBO UIF POF ZPV DPNF VQ XJUI

'PS FYBNQMF
JG ZPV EFDJEF UIBU UIF NBYJNVN SFXBSE SJTL SBUJP UIBU
ZPV DBO TVTUBJO PO B TIPSU WPMBUJMJUZ TZTUFN UP CSFBL FWFO JT
ZPV OFFE
UP NBLF UIF BDUVBM DVUPGG SBUJP PS

0G DPVSTF
IBWJOH B DVUPGG SBUJP XJMM EFDSFBTF ZPVS USBEF BDDVSBDZ 5IF
SFBTPO GPS UIJT JT UIBU OPX
JOTUFBE PG XBJUJOH BMM UIF XBZ VOUJM FYQJSBUJPO
UP TFF JG UIF QSJDF PG UIF VOEFSMZJOH XJMM DPNF CBDL XJUIJO ZPVS SBOHF
ZPV
BSF DVUUJOH ZPVS USBEF PGG CFGPSF BOE MPDLJOH JO B MPTT 5IFSFGPSF
ZPV XJMM
NJTT PVU PO UJNFT XIFO UIF VOEFSMZJOH DPNFT CBDL
BOE UIJT XJMM DBVTF ZPV
UP IBWF NPSF MPTJOH USBEFT "EEJUJPOBMMZ
UIFSF NBZ CF FYUSFNF UJNFT XIFO
UIF VOEFSMZJOH OPU POMZ DPNFT CBDL CVU BMTP DSPTTFT ZPVS PUIFS PQUJPO MFH T
TUSJLF QSJDF
DBVTJOH ZPV UP MPTF PO CPUI QPTJUJPOT 0G DPVSTF
UIJT XJMM CF
B SBSF PDDVSSFODF
CVU PODF BHBJO
TUJDLJOH XJUI UIF DPNNPO UIFNF PG UIJT
TFDUJPO
ZPV OFFE UP QMBO GPS FWFSZUIJOH

5IFTF UXP BTQFDUT EPO U NFBO UIBU ZPV IBWF UP HJWF VQ PO B WPMBUJMJUZ
TIPSU USBEJOH TZTUFN 5IFZ TJNQMZ NFBO UIBU ZPV OFFE UP BEE NPSF QBSBN
FUFST JO PSEFS UP USZ UP QVU UIF PEET JO ZPVS GBWPS

RULE 2: COLLECT ENOUGH PREMIUM

5IF BWBJMBCMF QSFNJVN UP DPMMFDU XIFO USBEJOH B WPMBUJMJUZ TIPSU TUSBUFHZ
HSFBUMZ EFQFOET PO NBSLFU WPMBUJMJUZ *G UIF WPMBUJMJUZ JT IJHI
UIF PVUĄPGĄUIFĄ
NPOFZ PQUJPOT BCPWF UIF NBSLFU QSJDF PG UIF VOEFSMZJOH XJMM CF QSJDFE
IJHIFS 5IJT JT EVF UP UIF GBDU UIBU UIFSF JT B IJHIFS DIBODF PG UIF VOEFSMZ
JOH T SFBDIJOH UIPTF MFWFMT

-FU T MPPL BU BO FYBNQMF UP JMMVTUSBUF UIJT QPJOU -FU T BTTVNF UIBU UIF
4 1 GVUVSFT BSF USBEJOH BU " PQUJPO NBZ DPTU POMZ EVSJOH MPX
WPMBUJMJUZ
XIJMF UIF TBNF PQUJPO NBZ DPTU EVSJOH IJHIFS WPMBUJMJUZ
4JODF ZPV BSF TFMMJOH UIF PQUJPO
ZPV BSF BJNJOH UP DPMMFDU UIF QSFNJVN PO
UIF USBEF 5IF NPSF ZPV DPMMFDU
UIF NPSF BEWBOUBHFPVT JU JT GPS ZPV 4FF
&YIJCJU

The Volatility Short Trading Rules 235

US 500 (Jun) >1323 5.00 7.50 US 500 (Jun) >1323 2.00 5.00
US 500 (Jun) >1320 15.00 18.00 US 500 (Jun) >1320 4.00 7.00
US 500 (Jun) >1317 20.00 23.50 US 500 (Jun) >1317 18.00 21.00
US 500 (Jun) >1314 31.50 35.00 US 500 (Jun) >1314 31.00 33.00
US 500 (Jun) >1301 47.00 51.50 US 500 (Jun) >1301 56.00 58.00
US 500 (Jun) >1298 61.00 65.00 US 500 (Jun) >1298 68.00 72.00
US 500 (Jun) >1295 74.00 77.50 US 500 (Jun) >1295 75.50 78.00
US 500 (Jun) >1292 88.00 90.00 US 500 (Jun) >1292 88.00 91.00

Binary option pricing during high volatility Binary option pricing during low volatility

EXHIBIT 16.7 Option Chains during High and Low Volatility

5IF ESBXCBDL JT UIBU EVSJOH QFSJPET PG IJHIFS WPMBUJMJUZ
UIF VOEFSMZ
JOH JT NPSF MJLFMZ UP NBLF B CJHHFS NPWF 5IF TVCTFRVFOU TFDUJPO XJMM
BEESFTT IPX GBS BXBZ ZPV OFFE UP TFMM PQUJPOT XJUI B WPMBUJMJUZ TIPSU TUSBU
FHZ *O UIF NFBOUJNF
MFU T ESJWF IPNF UIF DPODFQU PG DPMMFDUJOH FOPVHI
QSFNJVN

*O UIF QSFWJPVT FYBNQMF
UIF 4 1 GVUVSFT BSF NPSF MJLFMZ UP DMPTF BCPWF
XIFO UIF WPMBUJMJUZ JT IJHIFS UIBO UIFZ BSF UP DMPTF BCPWF XIFO
UIF WPMBUJMJUZ JT MPXFS 5IJT JT UIF SFBTPO ZPV DBO DPMMFDU B IJHIFS QSFNJVN

8IFO JU DPNFT UP UIF MPOH MFH PG UIF USBEF
ZPV BMTP TUBOE UP NBLF NPSF
NPOFZ PO UIF TBNF TUSJLF QSJDF PQUJPO EVSJOH QFSJPET PG IJHI WPMBUJMJUZ UIBO
ZPV EP EVSJOH QFSJPET PG MPX WPMBUJMJUZ 8IFO UIFSF JT IJHI WPMBUJMJUZ JO UIF
NBSLFU
UIFSF XJMM CF B IJHIFS DIBODF UIBU UIF QSJDF PG UIF VOEFSMZJOH XJMM
ESPQ CFMPX UIF TUSJLF QSJDF PG UIF JOĄUIFĄNPOFZ PQUJPO 6TJOH UIF TBNF
FYBNQMF
JG UIF 4 1 GVUVSFT BSF USBEJOH BU
UIFZ XJMM CF NPSF MJLFMZ UP
DMPTF CFMPX BU FYQJSBUJPO EVSJOH QFSJPET PG IJHI WPMBUJMJUZ UIBO EVSJOH
QFSJPET PG MPX WPMBUJMJUZ

)PXFWFS
EVSJOH QFSJPET PG MPX WPMBUJMJUZ
UIF 4 1 GVUVSFT XJMM CF
MFTT MJLFMZ UP ESPQ CFMPX UIF TUSJLF QSJDF 4JODF UIFSF JT B IJHIFS
DIBODF PG UIF VOEFSMZJOH T TUBZJOH BCPWF UIF TUSJLF QSJDF PG UIF PQUJPO BU
FYQJSBUJPO BOE UIF PQUJPO T FYQJSJOH JOĄUIFĄNPOFZ
UIF QSJDF PG UIF PQUJPO
XJMM CF IJHIFS EVSJOH QFSJPET PG MPX WPMBUJMJUZ UIBO EVSJOH QFSJPET PG IJHI
volatility.

"OPUIFS XBZ UP MPPL BU JU JT UP UIJOL PG GBJS NBSLFU 4JODF UIF QSFNJVN
PG B CJOBSZ PQUJPO JT B GBJS NBSLFU QSJDF EVSJOH QFSJPET PG IJHI WPMBUJMJUZ

UIFSF JT MFTT DIBODF UIBU BO JOĄUIFĄNPOFZ PQUJPO XJMM TUBZ JOĄUIFĄNPOFZ
TP
GFXFS QFPQMF BSF HPJOH UP XBOU UP CVZ JU "OE EVSJOH QFSJPET PG MPX WPMB
UJMJUZ
NPSF QFPQMF XJMM UIJOL UIBU UIF PQUJPO XJMM FOE VQ JOĄUIFĄNPOFZ BOE
NPSF QFPQMF XJMM XBOU UP CVZ JU 4JODF NPSF QFPQMF BSF CVZJOH
UIF QSJDF
XJMM HP VQ BOE CF IJHIFS 5IFSFGPSF
UIF QSJDF PG JOĄUIFĄNPOFZ PQUJPOT JT
IJHIFS EVSJOH QFSJPET PG MPX WPMBUJMJUZ 4FF &YIJCJU

4JODF ZPV TUBOE UP DPMMFDU QFS DPOUSBDU NJOVT UIF PQUJPO QSFNJVN
PO ZPVS MPOH USBEF
JG ZPV BSF QSPåUBCMF BU FYQJSBUJPO
UIFO ZPV XPVME DPM
MFDU NPSF EVSJOH QFSJPET PG IJHI WPMBUJMJUZ UIBO ZPV XPVME EVSJOH QFSJPET PG

236 BINARY OPTIONS

US 500 (Jun) >1323 5.00 7.50 US 500 (Jun) >1323 2.00 5.00
US 500 (Jun) >1320 15.00 18.00 US 500 (Jun) >1320 4.00 7.00
US 500 (Jun) >1317 20.00 23.50 US 500 (Jun) >1317 18.00 21.00
US 500 (Jun) >1314 31.50 35.00 US 500 (Jun) >1314 31.00 33.00
US 500 (Jun) >1301 47.00 51.50 US 500 (Jun) >1301 56.00 58.00
US 500 (Jun) >1298 61.00 65.00 US 500 (Jun) >1298 68.00 72.00
US 500 (Jun) >1295 74.00 77.50 US 500 (Jun) >1295 75.50 78.00
US 500 (Jun) >1292 88.00 90.00 US 500 (Jun) >1292 88.00 91.00

Binary option pricing during high volatility Binary option pricing during low volatility

EXHIBIT 16.8 Graphical Representation of Option with High Premium

MPX WPMBUJMJUZ 0OF IVOESFE EPMMBST NJOVT B TNBMMFS OVNCFS JT HPJOH UP CF
NPSF UIBO NJOVT B CJHHFS OVNCFS

&YIJCJU EFQJDUT UIF QSJDF BOE QSPåU QPUFOUJBM PG B MPOH JOĄUIFĄNPOFZ
option during high volatility.

$100 – Premium = Profit
100

Profit
75

Premium 50
25

0

EXHIBIT 16.9 Graphical Representation of P&L on Both the Long and Short
Positions

5BLJOH BMM UIJT JOUP DPOTJEFSBUJPO
ZPV IBWF UP XFJHI PVU UXP PQUJPOT
%VSJOH QFSJPET PG MPX WPMBUJMJUZ
UIFSF NBZ OPU CF FOPVHI QSFNJVN GPS ZPV
UP DPMMFDU "OE EVSJOH QFSJPET PG IJHI WPMBUJMJUZ
ZPV DBO QJDL VQ TVCTUBOUJBM
QSFNJVN CVU UIF VOEFSMZJOH JT NPSF MJLFMZ UP NPWF PVUTJEF PG ZPVS QSFEF
fined range.

5IF XBZ UP BEESFTT UIJT JTTVF JT UP åSTU EFUFSNJOF IPX NVDI ZPV OFFE
UP DPMMFDU GSPN FBDI USBEF 5IJT DBO CF EFUFSNJOFE CZ ZPVS SFXBSE SJTL
SBUJP *G CBTFE PO IJTUPSJDBM BOBMZTJT ZPV EFUFSNJOF UIBU ZPV OFFE UP IBWF B
SFXBSE SJTL SBUJP
ZPV DBO DBMDVMBUF UIF BNPVOU UIBU ZPV OFFE UP DPMMFDU
JO PSEFS UP NBJOUBJO UIJT SBUJP XJUI ZPVS USBEJOH TZTUFN

'JSTU
ZPV OFFE UP DPOTJEFS UIF USBOTBDUJPO DPTUT 8IFO ZPV BSF CVZJOH
PS TFMMJOH B CJOBSZ PQUJPO
ZPV BSF CVZJOH BU UIF BTL QSJDF BOE TFMMJOH BU UIF
CJE 5ZQJDBMMZ CJOBSZ PQUJPOT XJMM IBWF B UXPĄ UP UISFFĄQPJOU TQSFBE XIFSF
FWFSZ QPJOU JT XPSUI QFS DPOUSBDU "EEJUJPOBMMZ
UIFSF JT B DPNNJTTJPO

The Volatility Short Trading Rules 237

UP FOUFS UIF USBEF BOE FYJU UIF USBEF BOE B TFUUMFNFOU GFF UIBU ZPV IBWF UP
QBZ JG ZPV BSF QSPåUBCMF BU FYQJSBUJPO "MUPHFUIFS
ZPV TIPVME BTTVNF UIBU
ZPV XJMM FOE VQ QBZJOH BU MFBTU QFS MFH JO USBOTBDUJPO DPTUT JG ZPV BSF
QSPåUBCMF &YIJCJU TIPXT UIF DPNNJTTJPO BOE TFUUMFNFOU WBSJBCMFT
GPS CJOBSZ PQUJPOT

EXHIBIT 16.10 Transaction Costs

Trade Win Loss

Entry Commission N/A
Exit prior to settlement Commission Commission
Settlement Settlement fee Nothing

5IFSFGPSF
JG ZPV IPME FJUIFS MFH PG ZPVS CJOBSZ PQUJPO TQSFBE VOUJM FY
QJSBUJPO BOE ZPV DPMMFDU JO QSFNJVN SFWFOVF
ZPVS BDUVBM QSPåU XJMM CF
POMZ
TJODF XFOU UP DPNNJTTJPO UP FOUFS UIF USBEF BOE BOPUIFS
XFOU UP TFUUMFNFOU GFF XIFO ZPVS USBEF TFUUMFE JO QSPåU

'PS FYBNQMF
XIFO ZPV FOUFS B MPOH JOĄUIFĄNPOFZ USBEF
ZPV QBZ
QFS DPOUSBDU *G ZPV BSF DPSSFDU PO ZPVS USBEF BOE ZPV IPME VOUJM FYQJSBUJPO

ZPV XJMM NBLF POMZ QFS DPOUSBDU SFWFOVF 0ODF ZPV TVCUSBDU USBOTBDUJPO
DPTUT
ZPVS SFWFOVF XJMM CF DVU JO IBMG UP BU UIF NPTU

'PS B TIPSU USBEF
JU T B TJNJMBS TDFOBSJP *G ZPV XBOU UP TFMM BO PVUĄPGĄ
UIFĄNPOFZ PQUJPO GPS
UIFO ZPV XJMM QVU VQ JO DPMMBUFSBM :PV XJMM FOE
VQ QBZJOH JO USBOTBDUJPO DPTUT JG ZPV IPME VOUJM FYQJSBUJPO
BOE BU MFBTU
JG ZPV EFDJEF UP HFU PVU FBSMZ

"MUIPVHI JU NBZ TFFN MJLF B MPU PG USBOTBDUJPO DPTUT
FWFO B SFUVSO
PO B DPMMBUFSBM JT OPU UIBU CBE *U DPNFT PVU UP QFSDFOU QFS XFFL *G
ZPV NBLF KVTU POF USBEF QFS XFFL MJLF UIJT
ZPV DBO FBSO PWFS QFSDFOU
QFS ZFBS PO ZPVS EFQPTJUT 5IBU JT
PG DPVSTF
JG ZPV EPO U MPTF

4P UIF åSTU SVMF PG DPMMFDUJOH FOPVHI QSFNJVN JT UP NBLF TVSF UIBU
ZPV DPMMFDU FOPVHI UP DPWFS USBOTBDUJPO DPTUT 5ISFF UP GPVS EPMMBST QFS MFH
TIPVME CF UIF NJOJNBM OVNCFS XJUI CJOBSZ PQUJPOT &WFO JG ZPV IPME VOUJM
FYQJSBUJPO
JG ZPV DPMMFDU MFTT UIBO JO USBOTBDUJPO DPTUT
UIF FOUSZ DPN
NJTTJPO BOE TFUUMFNFOU GFF XJMM TJNQMZ FBU BXBZ ZPVS QSPåUT

/PX ZPV OFFE UP MPPL BU ZPVS SFXBSE SJTL SBUJP " HPPE XBZ UP EFUFSNJOF
SFXBSE SJTL SBUJPT GPS WPMBUJMJUZ TIPSU TQSFBET JT UP BOBMZ[F IJTUPSJDBM EBUB UP
TFF IPX NBOZ UJNFT DFSUBJO MFWFMT XFSF CSFBDIFE 1BTU QSJDF EBUB BSF OPU
BO JOEJDBUJPO PG GVUVSF NPWFNFOUT
CVU JU TIPVME HJWF ZPV B CBMMQBSL JEFB PG
XIBU DBO CF FYQFDUFE 4P MFU T MPPL BU UIF EBUB GPS UIF 4 1 GVUVSFT BHBJO

"T ZPV DBO TFF &YIJCJU

GSPN UP UIF 4 1 NPWFE CZ
NPSF UIBO QFSDFOU VQ PS EPXO QFSDFOU PG UIF UJNF 5IJT NFBOT UIBU
GPS FWFSZ GPVS WPMBUJMJUZ TIPSU TQSFBET UIBU ZPV XJMM QVU PO XJUI TUSJLF QSJDFT
BU MFBTU QFSDFOU BXBZ
ZPV XJMM CF DPSSFDU UISFF UJNFT BOE XSPOH PODF

238

EXHIBIT 16.11 Weekly S&P 500 Futures, Five‐Year Intervals

–6+% –5% –4% –3% –2% 2% 3% 4% 5% 6+%

changes changes changes changes changes changes changes changes changes changes

1/9/2012 – # of weeks: 10 14 27 39 58 57 30 19 13 8
1/9/2007
3.86%
percentage: 2 5.41% 10.42% 15.06% 22.39% 22.01% 11.58% 7.34% 5.02% 3.09%
3 5 10 28 26 11 4 2 1
1/8/2007 – # of weeks: 0.78%
1/8/2002 3

percentage: 1.16% 1.16% 1.94% 3.88% 10.85% 10.08% 4.26% 1.55% 0.78% 0.39%
15 5 13 19 41 51 24 13 3 2
1/7/2002 – # of weeks:
1/7/1997 1.94%

percentage: 15 1.94% 162.50% 7.36% 15.89% 19.77% 9.30% 5.04% 1.16% 0.78%
1.71% 22 45 68 127 134 65 36 18 11
Total: # of weeks:
2.84% 5.81% 8.77% 16.39% 17.29% 8.39% 4.65% 2.32% 1.42%
percentage:

1/7/1997 –
1/9/2012

Grand Total: # of weeks: 22 45 68 127 138 65 36 18 11
2.50% 5.12% 7.74% 14.45% 15.70% 7.39% 4.10% 2.05% 1.25%
percentage:

Note: Calculated only for five‐day and four‐day weeks. Open intervals (i.e., 3% changes = 3+%)

The Volatility Short Trading Rules 239

5IJT NFBOT UIBU ZPV DBO MPTF UISFF UJNFT BT NVDI PO ZPVS MPTJOH
TQSFBET BT ZPV NBLF PO ZPVS XJOOJOH TQSFBET BOE TUJMM CSFBL FWFO /PX
SFNFNCFS ZPV DBOOPU MPTF PO CPUI MFHT PG ZPVS TQSFBE
TP JU NBZ CF B
HPPE JEFB UP MPPL BU FBDI MFH JOEJWJEVBMMZ #BTFE PO UIF TBNF UBCMF
B
CSFBDI QFSDFOU BCPWF NBSLFU QSJDF IBQQFOFE POMZ QFSDFOU PG UIF
UJNF
BOE B CSFBDI QFSDFOU CFMPX NBSLFU QSJDF IBQQFOFE QFSDFOU
PG UIF UJNF -FU T VTF UIF IJHIFS OVNCFS PG UIF UXP GPS TJNQMJDJUZ BOE UP
CF PO UIF TBGF TJEF 4JODF UIF QSJDF XJMM CSFBDI POF MFH QFSDFOU PG UIF
UJNF
UIFO ZPV DBO MPTF BT NVDI BT TJY UJNFT XIBU ZPV NBLF PO UIF USBEF
BOE TUJMM CSFBL FWFO

5IJT JT XIFSF UIF TZTUFN TUBSUT UP HFU FYDJUJOH MFU T MPPL BU IPX UIJT
OVNCFS JT EFSJWFE "DDPSEJOH UP &YIJCJU
PWFS UIF QBTU åWF ZFBST ZPV
XPVME MPTF QFSDFOU PG UIF UJNF XIFO ZPV CPVHIU BO JOĄUIFĄNPOFZ PQUJPO
XJUI B TUSJLF QSJDF QFSDFOU BXBZ GSPN UIF NBSLFU QSJDF 5IBU NFBOT UIBU
ZPV XPVME MPTF POF UJNF GPS FWFSZ USBEFT UIBU ZPV NBLF -FU T VTF TJY
UP CF TBGF 5IBU NFBOT ZPV DBO MPTF TJY UJNFT BT NVDI BT ZPV XJO PO ZPVS
MPTJOH PQUJPO USBEF BOE TUJMM CSFBL FWFO

'PS UIF VQQFS TUSJLF QSJDF CSFBDI
UIF QFSDFOUBHF JT QFSDFOU UIBU
UIF QSJDF XJMM NPWF VQ CZ NPSF UIBO QFSDFOU JO POF XFFL 5P CF PO UIF
TBGF TJEF
XF XJMM VTF UIF IJHIFS PG UIF UXP TDFOBSJPT BOE XJMM DBSSZ PWFS UIF
TJY GSPN UIF EPXO NPWF

/PX XF IBWF PVS NJOJNVN SFXBSE SJTL SBUJP PG ,OPXJOH UIJT
XF
DBO OPX EFUFSNJOF UIBU XF XJMM DVU PGG PVS USBEF BU TJY UJNFT UIF QSFNJVN
XF TUBOE UP DPMMFDU 4JODF XF XBOU UP NPSF UIBO CSFBL FWFO
XF DBO TUBSU
CZ TFUUJOH UIJT SFXBSE SJTL SBUJP UP GPVS

8JUI UIJT JO NJOE
JG XF TFMM BO PVUĄPGĄUIFĄNPOFZ PQUJPO GPS
XF XJMM
DVU JG UIF WBMVF HSPXT UP "OE JG XF CVZ BO JOĄUIFĄNPOFZ PQUJPO GPS

XF XJMM DVU JG UIF WBMVF GBMMT UP 5IJT DSFBUFT BOPUIFS JTTVF .PWFT PG
QPJOUT BSF GBJSMZ MJLFMZ UP IBQQFO JO UIF NBSLFU
BOE TJODF XF BSF
DPMMFDUJOH TVDI B TNBMM QSFNJVN
XF OFFE UP NBLF TVSF UIBU UIF DVUPGGT
EPO U IBQQFO UPP PGUFO

4P OPX ZPV BT B USBEFS XJMM OFFE UP BOBMZ[F QSJDF EBUB BOE EFNP USBEFT
UP EFUFSNJOF NJOJNVN QSFNJVNT UP DPMMFDU BOE NJOJNVN DVUPGG BNPVOUT

"T ZPV DBO TFF
ZPVS DVUPGG SVMF JT CBTFE PO UIF QSFNJVN UIBU ZPV DPM
MFDU CFGPSF USBOTBDUJPO DPTUT *EFBMMZ
ZPV XBOU UP CF BCMF UP DPMMFDU BU MFBTU
UP JO QSFNJVN 5IJT XJMM HJWF ZPV FOPVHI DVTIJPO UP IBWF OPSNBM
DVUPGG SVMFT

*O TPNF JOTUBODFT
UIFSF TJNQMZ XJMM OPU CF PQUJPOT GBS FOPVHI BXBZ
BWBJMBCMF XIFSF JU T XPSUI ZPVS XIJMF UP TFMM 4P JO UIF OFYU TFDUJPOT XF
XJMM BEESFTT NJOJNVN TFMMJOH EJTUBODF BOE UJNF VOUJM FYQJSBUJPO
XIJDI
JT BOPUIFS DSJUJDBM DPNQPOFOU PG CVJMEJOH B QSPQFS QSFNJVN DPMMFDUJPO
TZTUFN

240 BINARY OPTIONS

RULE 3: SELL FAR ENOUGH AWAY FROM MARKET PRICE

/PX UIBU ZPV LOPX IPX NVDI QSFNJVN ZPV XBOU UP DPMMFDU PO CPUI PG
ZPVS PQUJPO MFHT
ZPV OFFE UP EFUFSNJOF IPX GBS BXBZ UIF TUSJLF QSJDFT
TIPVME CF GSPN UIF NBSLFU QSJDF XIFO ZPV FOUFS UIF USBEF

5IF FBTJFTU XBZ UP MPPL BU JU JT PO B QFSDFOUBHF CBTJT
SBUIFS UIBO B
QPJOU CBTJT -FU T VTF UIF 4 1 GVUVSFT BOE UIF 4 1 EBUB BT BO FYBNQMF 4FF
&YIJCJU

-FU T åSTU BOBMZ[F TUSJLF QSJDFT QFSDFOU BXBZ #PUI NPWFT QFSDFOU
BCPWF NBSLFU BOE QFSDFOU CFMPX NBSLFU IBQQFOFE SPVHIMZ QFSDFOU
PG UIF UJNF 5IBU NFBOT UIBU UP CSFBL FWFO
ZPV OFFE UP NBLF BU MFBTU POF
åGUI BT NVDI BT NVDI PO ZPVS XJOOJOH USBEFT BT ZPV XPVME PO ZPVS MPTJOH
trades.

5IFSFGPSF
ZPVS DVUPGG IFSF XJMM CF åWF UJNFT BT NVDI BT UIF QPUFOUJBM
QSFNJVN ZPV TUBOE UP NBLF PO UIF USBEF 5IF QSFNJVN UIBU ZPV TUBOE UP
NBLF JT BMXBZT HPJOH UP CF FRVBM UP NJOVT ZPVS DPMMBUFSBM UJNFT UIF
OVNCFS PG DPOUSBDUT

*U JT IBSE UP EFUFSNJOF IPX CJH UIF DVUPGG TIPVME CF *G JU T UPP TNBMM

UIFO TMJHIU ýVDUVBUJPOT JO UIF QSJDF PG UIF VOEFSMZJOH XJMM DBVTF ZPV UP IBWF
UP DVU PGG ZPVS USBEF *G UIF DVUPGG WBMVF JT UPP CJH
UIFO ZPV XJMM MPTF B MPU
NPSF PO ZPVS MPTJOH USBEFT UIBO ZPV NBLF PO ZPVS XJOJOH USBEFT

" HPPE SVMF PG UIVNC JT UP DVU PGG UIF USBEF POMZ XIFO UIF TUSJLF QSJDF
JT CSFBDIFE 5ZQJDBMMZ
XIFO UIJT IBQQFOT
UIF QSJDF PG UIF PQUJPO XJMM CF
BSPVOE QFS DPOUSBDU
TJODF NPTU BUĄUIFĄNPOFZ CJOBSZ PQUJPOT BSF QSJDFE
BSPVOE ,OPXJOH UIJT DBO IFMQ ZPV EFUFSNJOF IPX NVDI QSFNJVN UP
DPMMFDU BOE IPX GBS BXBZ UP TFMM

-FU T BTTVNF UIBU ZPV BSF TFMMJOH BO PQUJPO GPS
QFSDFOU BXBZ
GSPN UIF NBSLFU QSJDF PG UIF 4 1 GVUVSFT 5IJT NFBOT UIBU ZPVS DPMMBUFSBM
JT #BTFE PO UIF UIFPSZ NFOUJPOFE
UIF QSJDF PG UIF PQUJPO XJMM CF
BSPVOE XIFO UIF QSJDF PG UIF VOEFSMZJOH JT FRVBM UP UIF PQUJPO T TUSJLF
QSJDF 5IBU NFBOT UIBU UIF PQUJPO QSJDF XJMM NBLF SPVHIMZ B ĄQPJOU NPWF
against you.

*O UIJT DBTF
ZPV DBO TFF UIBU ZPVS DVUPGG IFSF XJMM CF TJY UJNFT UIF
QSFNJVN PO UIF PQUJPO ,OPXJOH UIJT
ZPV DBO OPX MPPL CBDL BU UIF IJT
UPSJDBM EBUB BOE TFF JG UIJT USBEF NBLFT TFOTF #BTFE PO PQUJPOT QFSDFOU
BXBZ GSPN NBSLFU QSJDF
ZPVS NJOJNVN BMMPXBCMF DVUPGG JT åWF UJNFT UIF
QSFNJVN 5IF QSFNJVN NBZ CF UPP TNBMM UP TFMM QFSDFOU BXBZ

-FU T MPPL BU BOPUIFS FYBNQMF
CVU UIJT UJNF XF XJMM MPPL BU B MPOH JOĄ
UIFĄNPOFZ PQUJPO QVSDIBTFE QFSDFOU BXBZ " QFSDFOU ESPQ JO UIF QSJDF
PG UIF 4 1 GVUVSFT IBQQFOFE QFSDFOU PG UIF XFFLT JO UIF MBTU åWFĄZFBS
QFSJPE #BTFE PO UIJT
ZPV OFFE UP NBLF BU MFBTU POF TJYUI BT NVDI PO
ZPVS XJOOJOH USBEFT BT ZPV MPTF PO ZPVS MPTJOH USBEFT -FU T BTTVNF UIBU
BO JO UIF NPOFZ PQUJPO QFSDFOU BXBZ GSPN NBSLFU QSJDF JT QSJDFE BU

EXHIBIT 16.12 Weekly S&P 500 Futures, Five‐Year Intervals

–6+% –5% –4% –3% –2% 2% 3% 4% 5% 6+%

changes changes changes changes changes changes changes changes changes changes

1/9/2012– # of weeks: 10 14 27 39 58 57 30 19 13 8
1/9/2007
3.86% 5.02% 3.09%
percentage: 2 5.41% 10.42% 15.06% 22.39% 22.01% 11.58% 7.34% 2 1
3 5 10 28 26 11 4
1/8/2007– # of weeks: 0.78% 0.78% 0.39%
1/8/2002 3 3 2

percentage: 1.16% 1.16% 1.94% 3.88% 10.85% 10.08% 4.26% 1.55% 1.16% 0.78%
15 5 13 19 41 51 24 13 18 11
1/7/2002– # of weeks:
1/7/1997 1.94% 2.32% 1.42%

percentage: 15 1.94% 162.50% 7.36% 15.89% 19.77% 9.30% 5.04% 18 11
1.71% 22 45 68 127 134 65 36 2.05% 1.25%
Total: # of weeks:
2.84% 5.81% 8.77% 16.39% 17.29% 8.39% 4.65%
percentage:

1/7/1997–
1/9/2012

Grand Total: # of weeks: 22 45 68 127 138 65 36
2.50% 5.12% 7.74% 14.45% 15.70% 7.39% 4.10%
percentage:

Note: Calculated only for five‐day and four‐day weeks. Open intervals (i.e., 3% changes = 3+%).

241

242 BINARY OPTIONS

0ODF BHBJO
ZPV TIPVME BTTVNF UIBU UIF BUĄUIFĄNPOFZ WBMVF XJMM CF
#BTFE PO UIF PQUJPO QSFNJVN
UIFSF JT B ĄQPJOU ESPQ CFUXFFO UIF DVSSFOU
QSJDF PG UIF PQUJPO BOE UIF BU UIF NPOFZ WBMVF

*G ZPV BSF DPSSFDU
ZPV TUBOE UP DPMMFDU QFS DPOUSBDU BU FYQJSBUJPO
*G ZPV BSF XSPOH
ZPV DBO DVU BU VQ UP TJY UJNFT UIF QPUFOUJBM QSFNJVN UIBU
ZPV TUBOE UP DPMMFDU 5IFSFGPSF
ZPV DBO MFU UIF PQUJPO ESPQ BMM UIF XBZ
EPXO UP 4JODF UIF BUĄUIFĄNPOFZ WBMVF JT
UIJT MPPLT MJLF B SFBTPO
BCMF USBEF "OE ZPV DBO TFF UIBU UIFSF JT FOPVHI QSFNJVN UP CVZ UIF JO UIF
NPOFZ PQUJPO QFSDFOU BXBZ

"T ZPV DBO TFF
UIF EJTUBODF UIBU ZPVS TUSJLF QSJDFT TIPVME CF GSPN UIF
NBSLFU QSJDF JT B GVODUJPO PG NBOZ UIJOHT
JODMVEJOH ZPVS DVUPGG QBSBN
FUFST
NBSLFU WPMBUJMJUZ
BOE PQUJPO QSFNJVNT

0OF LFZ BTQFDU UP LFFQ JO NJOE JT UIBU UIFSF BSF QSPGFTTJPOBM JOTUJ
UVUJPOBM USBEFST XJUI UFBNT PG SJTL NBOBHFST BOE NBUIFNBUJDJBOT CFIJOE
UIFN UIBU BSF USBEJOH BHBJOTU ZPV 5IFSFGPSF
ZPV DBOOPU BTTVNF UIBU ZPV
XJMM CFBU UIFN CZ EPJOH KVTU UIFTF CBTJD NBUIFNBUJDBM DBMDVMBUJPOT *O PSEFS
UP IBWF USVF TVDDFTT XJUI B WPMBUJMJUZ TIPSU TZTUFN
ZPV OFFE UP åOE BOE
FYQMPJU TPNF LJOE PG BO FEHF UIBU XPSLT GPS ZPV 5IJT DPVME CF UFDIOJDBM

GVOEBNFOUBM
DPOUSBSJBO
PS B DPNCJOBUJPO PG BMM UISFF #FGPSF BMMPDBUJOH
TFSJPVT NPOFZ UP UIF TZTUFN
ZPV OFFE UP UFTU UIJT FEHF BOE EFNP USBEF JU

BOE FWFO USBEF JU JO B TNBMMFS MJWF BDDPVOU 5IF OFYU TFDUJPO XJMM HJWF ZPV
TPNF JEFBT PG IPX UP EFWFMPQ UIJT FEHF

RULE 4: USE UNDERLYING INSTRUMENTS
THAT REVERT TO THE MEAN

#JOBSZ PQUJPOT BSF BWBJMBCMF PO NPSF UIBO VOEFSMZJOH JOTUSVNFOUT
5IFTF JODMVEF DVSSFODZ QBJST
HPME
TJMWFS
PJM
JOEFY GVUVSFT GSPN BMM PWFS
UIF XPSME
BOE FWFO OBUVSBM HBT )PX EP ZPV EFDJEF XIJDI VOEFSMZJOH JO
TUSVNFOU UP VTF B WPMBUJMJUZ TIPSU TUSBUFHZ PO

5IJT JT HPJOH UP TFFN WFSZ DPVOUFSJOUVJUJWF
CVU XIFO USBEJOH B WPMBUJM
JUZ TIPSU TZTUFN
NPTU PG UIF NPOFZ UIBU ZPV NBLF GPS UIF ZFBS JT EVSJOH
QFSJPET PG IJHI WPMBUJMJUZ 5IF SFBTPO GPS UIJT JT UIBU EVSJOH UIFTF QFSJPET
QSFNJVNT PG PVUĄPGĄUIFĄNPOFZ PQUJPOT BCPWF UIF NBSLFU QSJDF HP VQ BOE
QSFNJVNT PG JOĄUIFĄNPOFZ CJOBSZ PQUJPOT GBSUIFS CFMPX NBSLFU QSJDF HP
EPXO 5IJT BMMPXT UIF USBEFS UP DPMMFDU FOPVHI QSFNJVN JO PSEFS UP NBLF
HPPE SFUVSOT XJUI UIF TZTUFN

.BOZ USBEFST CFMJFWF UIBU WPMBUJMJUZ JT DZDMJDBM 5IFSFGPSF
QFSJPET PG
IJHI WPMBUJMJUZ BSF VTVBMMZ GPMMPXFE CZ QFSJPET PG MPX WPMBUJMJUZ )PXFWFS

QSJDFT PG CJOBSZ PQUJPOT VTVBMMZ EP OPU BEKVTU BT RVJDLMZ 5IFSFGPSF
ZPV
DBO HFU JOUP USBEFT SFBMMZ GBS BXBZ GSPN NBSLFU QSJDF BOE TUBOE UP DPMMFDU
TVGåDJFOU QSFNJVN

The Volatility Short Trading Rules 243

$POWFSTFMZ
QFSJPET PG FYUSFNF MPX WPMBUJMJUZ BSF XIFO ZPV TIPVME CF
UIF NPTU DBSFGVM 5IFSF JT VTVBMMZ WFSZ MJUUMF QPUFOUJBM QSFNJVN UP DPMMFDU
.BOZ WPMBUJMJUZ TIPSU USBEFST BSF UFNQUFE UP HFU JOUP UIFJS QPTJUJPOT DMPTFS
UP NBSLFU QSJDF EVSJOH UIFTF UJNFT #VU UIJT JT B CJH USBQ TJODF NBSLFUT BSF
MJLFMZ UP NBLF B TVCTUBOUJBM NPWF JO POF EJSFDUJPO PS BOPUIFS BU BOZ UJNF
4FF &YIJCJU

25.00% Probability of % change
20.00%
15.00% 1/9/2012–1/9/2007
10.00% 1/3/1995–1/9/2012

5.00% 1/9/2012–1/9/2007
0.00%

–6+% changes
–5% changes
–4% changes
–3% changes
–2% changes
2% changes
3% changes
4% changes
5% changes
6+% changes

EXHIBIT 16.13 Option Chain during High Volatility and Low Volatility

5IF LFZ IFSF JT UP BOBMZ[F IJTUPSJDBM EBUB GPS ZPVS VOEFSMZJOH JOTUSV
NFOU BOE EFNP USBEF ZPVS TUSBUFHZ FOPVHI UP HFU B HPPE GFFM GPS IPX UIF
JOTUSVNFOU JT HPJOH UP CFIBWF 'PS FYBNQMF
GPS 4 1 GVUVSFT
BT B SVMF PG
UIVNC
JU JT B HPPE JEFB GPS ZPVS TUSJLF QSJDFT UP CF BU MFBTU QFSDFOU BXBZ
GSPN NBSLFU QSJDF PO XFFLMZ WPMBUJMJUZ TIPSU USBEFT

4PNF USBEFST XJMM MPPL BU NVMUJQMF VOEFSMZJOH JOTUSVNFOUT BOE TFFL
PVU BSFBT PG IJHI WPMBUJMJUZ 5IJT JT B HPPE JEFB BT MPOH BT ZPV BSF QJDLJOH
VOEFSMZJOH JOTUSVNFOUT UIBU IJTUPSJDBMMZ IBWF CFFO NPSF MJLFMZ UP SFWFSU UP
UIF NFBO UIBO UP USFOE

4 1 GVUVSFT BSF B HSFBU VOEFSMZJOH JOTUSVNFOU UP VTF XJUI B WPMBUJM
JUZ TIPSU TUSBUFHZ
TJODF UIFZ IJTUPSJDBMMZ IBWF SFWFSUFE UP UIF NFBO
*OTUSVNFOUT MJLF HPME
PJM
BOE DFSUBJO DVSSFODZ QBJST VTVBMMZ EPO U GBSF
BT XFMM TJODF UIFZ BSF NPSF USFOEJOH JOTUSVNFOUT 5ZQJDBMMZ
UIFTF JOTUSV
NFOUT XJMM IBWF IJHIFSĄQSJDFE PVUĄPGĄUIFĄNPOFZ PQUJPOT BOE MPXFSĄQSJDFE
JOĄUIFĄNPOFZ PQUJPOT
XIJDI DBO QSPWJEF ZPV XJUI CFUUFS QSPåUBCJMJUZ JG ZPV
BSF DPSSFDU 5IF QSPCMFN JT UIBU UIFZ BSF NPSF MJLFMZ UP NPWF PVUTJEF UIF
TUSJLF QSJDFT UIBO BO JOTUSVNFOU MJLF 4 1 GVUVSFT 4FF &YIJCJU

244 BINARY OPTIONS

US 500 (Jun) >1323 5.00 7.50 US 500 (Jun) >1323 2.00 5.00
US 500 (Jun) >1320 15.00 18.00 US 500 (Jun) >1320 4.00 7.00
US 500 (Jun) >1317 20.00 23.50 US 500 (Jun) >1317 18.00 21.00
US 500 (Jun) >1314 31.50 35.00 US 500 (Jun) >1314 31.00 33.00
US 500 (Jun) >1301 47.00 51.50 US 500 (Jun) >1301 56.00 58.00
US 500 (Jun) >1298 61.00 65.00 US 500 (Jun) >1298 68.00 72.00
US 500 (Jun) >1295 74.00 77.50 US 500 (Jun) >1295 75.50 78.00
US 500 (Jun) >1292 88.00 90.00 US 500 (Jun) >1292 88.00 91.00

Binary option pricing during high volatility Binary option pricing during low volatility

EXHIBIT 16.14 Option Chains on Gold Futures and US 500

*O PSEFS UP CVJME UIF CFTU WPMBUJMJUZ TIPSU TUSBUFHZ GPS ZPVSTFMG
ZPV
XJMM OFFE UP BOBMZ[F BMM UIF QPTTJCMF VOEFSMZJOH JOTUSVNFOUT PO XIJDI ZPV
DBO USBEF CJOBSZ PQUJPOT BOE EFDJEF XIJDI POFT ZPV XJMM VTF :PV TIPVME
QFSGPSN BO BOBMZTJT PG XIBU QFSDFOUBHF PG UIF UJNF UIF QSJDF NPWFE
CZ Y QFSDFOU PWFS UIF QBTU UP ZFBST
BT JU XBT EPOF GPS UIF 4 1 JO
&YIJCJU

5ZQJDBMMZ
ZPV BSF NPTU MJLFMZ UP åOE UIBU JOEFYFT UFOE UP SFWFSU UP UIF
NFBO BOE DPNNPEJUJFT BOE DVSSFODJFT UFOE UP USFOE 5IFSFGPSF
WPMBUJMJUZ
TIPSU TUSBUFHJFT TIPVME XPSL CFUUFS PO JOEFYFT UIBO DPNNPEJUJFT 5IJT
PG
DPVSTF
JT KVTU B UIFPSZ
BOE PODF BHBJO UIF DPSSFDU BOTXFS EFQFOET PO ZPVS
SJTL UPMFSBODF BOE QSFGFSFODF "SF ZPV PLBZ XJUI IBWJOH UP DVU USBEFT PGG NPSF
PGUFO JO FYDIBOHF GPS DPMMFDUJOH B IJHIFS QSFNJVN PO ZPVS DPSSFDU USBEFT 5IJT
EBUB IBT UP CF EFUFSNJOFE CZ ZPV CFGPSF BOBMZ[JOH WBSJPVT VOEFSMZJOH EBUB

0ODF ZPV EFDJEF XIJDI VOEFSMZJOH JOTUSVNFOUT UP VTF
ZPV DBO BTTFTT
UIF PQUJPO QSFNJVNT FBDI XFFL BOE FOUFS XIBU ZPV CFMJFWF UP CF UIF NPTU
GBWPSBCMF USBEJOH PQQPSUVOJUZ CBTFE PO UIF NFUIPET EFTDSJCFE JO UIF TFD
tions above.

RULE 5: SELL OPTIONS WITH PROPER
DURATION UNTIL EXPIRATION

#JOBSZ PQUJPOT BSF BWBJMBCMF XJUI XFFLMZ
EBJMZ
BOE FWFO IPVSMZ FYQJSB
UJPOT 5ZQJDBMMZ
XJUI TIPSUFSĄUFSN PQUJPOT
UIFSF JT OPU FOPVHI QPUFOUJBM
QSPåU UP CF NBEF 0ODF BHBJO
JU CFDPNFT B RVFTUJPO PG OVNCFST &YIJCJU
TIPXT UIF EJTUSJCVUJPO EBUB GPS 4 1 GVUVSFT EBJMZ QFSDFOU NPWFT

"T ZPV DBO TFF
JO UIF QBTU åWF ZFBST UIF 4 1 GVUVSFT NPWF NPSF UIBO
QFSDFOU JO B EBZ QFSDFOU PG UIF UJNF 5IJT NFBOT UIBU ZPV DPVME IBWF
MPTU BT NVDI BT UJNFT ZPVS BWFSBHF XJO BOE TUJMM XPVME CF BCMF UP CSFBL
FWFO PO UIF TZTUFN 5IJT JT B WFSZ GBWPSBCMF CSFBLFWFO BDDVSBDZ 5IF RVFT
UJPO JT "SF UIFSF PQUJPOT BWBJMBCMF PVUTJEF UIF QFSDFOU SBOHF UIBU XPVME
ZJFME ZPV FOPVHI QPUFOUJBM QSFNJVN UP KVTUJGZ UIF USBEF 5IJT
PG DPVSTF
JT
TPNFUIJOH UIBU ZPV XPVME OFFE UP MPPL GPS JO ZPVS PQUJPO DIBJO

The Volatility Short Trading Rules 245

EXHIBIT 16.15 Daily S&P 500 Futures, Five‐Year Intervals

1% changes 2% changes 3% changes 4+% changes

1/9/2012– number of 106 98 55 40
1/9/2007 days: 8.41% 7.78% 4.37% 3.17%

percentage: 215 39 12 5
17.09% 3.10% 0.95% 0.40%
1/8/2007– number of
1/8/2002 days: 285 67 13 7
22.66% 5.33% 1.03% 0.56%
percentage:
606 204 80 52
1/7/2002– number of 16.05% 5.40% 2.12% 1.38%
1/7/1997 days:
827 204 80 52
percentage: 19.29% 4.76% 1.87% 1.21%

Total: number of
days:

percentage:

1/7/1997 –
1/9/2012

Grand Total: number of
days:

percentage:

Note: Closed intervals (i.e., 3% changes = 3–4%).

*G UIFSF BSF OP TVGåDJFOU QSFNJVNT BWBJMBCMF GBS FOPVHI PO UIF EBJMZ PQ
UJPOT
ZPV XPVME XBOU UP NPWF VQ UP XFFLMZ PQUJPOT 8IFO JU DPNFT UP XFFLMZ
PQUJPOT
ZPV OFFE UP EFUFSNJOF UIF CFTU EBZ PG UIF XFFL UP FOUFS ZPVS USBEF

4PNF USBEFST MJLF UP HFU JO BT TPPO BT UIF PQUJPO CFDPNFT BWBJMBCMF
UIJT IBQQFOT PO .POEBZ NPSOJOH GPS UIF 4 1 GVUVSFT PQUJPOT 0UIFS
USBEFST QSFGFS GPS NBSLFU EJSFDUJPO UP CF FTUBCMJTIFE BOE XBJU UP HFU JO
PO 5VFTEBZ 5IFSF BSF QPTJUJWFT BOE OFHBUJWFT UP FOUFSJOH ZPVS USBEF MBUFS
JO UIF XFFL 1SFNJVNT BSF B GVODUJPO PG UJNF VOUJM FYQJSBUJPO BOE QSJDF PG
UIF VOEFSMZJOH *G UIF VOEFSMZJOH XFSF UP TUBZ JO POF QMBDF
BT FYQJSBUJPO
BQQSPBDIFE
JOĄUIFĄNPOFZ PQUJPOT XPVME TUBSU UP JODSFBTF JO WBMVF TJODF
UIFSF JT MFTT UJNF GPS UIF VOEFSMZJOH UP GBMM CFMPX UIF PQUJPO T TUSJLF QSJDFT
"U UIF TBNF UJNF
UIF PVUĄPGĄUIFĄNPOFZ PQUJPOT XPVME EFDSFBTF JO WBMVF

BT UIF BNPVOU PG UJNF GPS UIF VOEFSMZJOH UP DSPTT BCPWF UIFJS TUSJLF QSJDFT
would decrease.

5IF VQTJEF UP TFMMJOH PQUJPOT XJUI MFTT UJNF VOUJM FYQJSBUJPO JT UIBU ZPVS
FYQPTVSF EFDSFBTFT 5IF MPOHFS ZPV BSF JO B WPMBUJMJUZ TIPSU USBEF
UIF NPSF
DIBODF UIFSF JT UIBU UIF VOEFSMZJOH JOTUSVNFOU XJMM DSPTT POF PG ZPVS PQ
UJPOT TUSJLF QSJDFT

246 BINARY OPTIONS

5IFSFGPSF
JG UIFSF JT FOPVHI QSPåUBCJMJUZ BWBJMBCMF CBTFE PO UIF PQUJPOT
QSFNJVNT
JU NBLFT TFOTF UP TFMM B GFX EBZT DMPTFS UP FYQJSBUJPO UIBO SJHIU BU
UIF CFHJOOJOH PG UIF XFFL 'PS FYBNQMF
ZPV DBO VTF .POEBZ UP EFUFSNJOF
UIF PWFSBMM EJSFDUJPO PG UIF NBSLFU BOE UIFO NBLF ZPVS USBEF PO 5VFTEBZ

+VTU BT XJUI BMM USBEJOH TZTUFNT
IBWJOH B GFFM GPS XIBU UIF VOEFSMZJOH
JOTUSVNFOU JT EPJOH JT WFSZ CFOFåDJBM UP ZPVS USBEJOH 'PS FYBNQMF
JG ZPV
TFF BO VQXBSE CJBT JO UIF NBSLFU
ZPV DBO CVZ ZPVS JOĄUIFĄNPOFZ PQUJPOT B
CJU DMPTFS UP NBSLFU QSJDF UIBO ZPV TFMM ZPVS PVUĄPGĄUIFĄNPOFZ PQUJPOT 0S
ZPV NBZ XBOU UP TLFX UIF OVNCFS PG DPOUSBDUT GPS FBDI MFH PG UIF USBEF
5IF HSFBU BTQFDU PG WPMBUJMJUZ TIPSU TQSFBE USBEJOH JT UIBU ZPV EPO U IBWF UP
CF SJHIU PO UIF EJSFDUJPO PG UIF NBSLFU ZPV KVTU IBWF UP CF OPU FYUSFNFMZ
XSPOH *O UIF OFYU TFDUJPO
MFU T MPPL JO XIBU BEEJUJPOBM BOBMZTJT ZPV DBO EP
JO PSEFS UP HFU B GFFM GPS UIF NBSLFU

RULE 6: PERFORM ADDITIONAL ANALYSIS IN ORDER
TO GET A FEEL FOR MARKET DIRECTION

#JOBSZ PQUJPOT NBSLFU NBLFST VTF BEWBODFE NBUIFNBUJDBM QSJODJQMFT UP
EFUFSNJOF UIF GBJS QSJDFT PG UIF BWBJMBCMF PQUJPOT *G UIF NBSLFU EFFNT UIF
PQUJPO UP CF DIFBQFS UIBO UIFJS GBJS QSJDF
UIFZ CVZ
BOE JG UIF NBSLFU EFFNT
UIF PQUJPO UP CF NPSF FYQFOTJWF
UIFZ TFMM

5IFSF BSF PQUJPO QSJDJOH DBMDVMBUPST BOE GPSNVMBT
TVDI BT UIF #MBDLĄ
4DIPMFT .PEFM
UIBU USBEFST BOE NBSLFU NBLFST VTF UP QSJDF UIF PQUJPOT
5ZQJDBMMZ
JOTUJUVUJPOT XJMM IBWF FOUJSF SFTFBSDI UFBNT CFIJOE PQUJPO USBE
FST 5IFSF BSF JOTUJUVUJPOT USBEJOH BMM JOTUSVNFOUT JODMVEJOH TUPDLT
PQUJPOT

GVUVSFT
BOE GPSFY 4P BT B SFUBJM USBEFS
ZPV BSF BMXBZT DPNQFUJOH XJUI BO
FOUJUZ UIBU IBT NPSF SFTPVSDFT UIBO ZPV IBWF

*O PSEFS UP CF TVDDFTTGVM
ZPV TIPVME OPU USZ UP CFBU UIF DPNQFUJOH
FOUJUJFT BT NPTU EJSFDUJPOBM TZTUFNT EP *OTUFBE
ZPV TIPVME VOEFSTUBOE
UIF EZOBNJDT JO UIF NBSLFU BOE XPSL JO MJOF XJUI UIPTF EZOBNJDT 5IF
CFTU XBZ UP QVU JU JT UIBU ZPV TIPVME HP XJUI UIF ýPX PG UIF NBKPS NBSLFU
participants.

'PS FYBNQMF
XJUI WBOJMMB QVU DBMM PQUJPOT
NBKPS NBSLFU QBSUJDJQBOUT
TVDI BT NVUVBM GVOET BOE QPSUGPMJP NBOBHFST QVSDIBTF QVUT GBS BXBZ GSPN
UIF NBSLFU QSJDF JO PSEFS UP QSPUFDU UIFJS MPOH POMZ QPSUGPMJPT 5IFZ BSF
QFSGFDUMZ åOF XJUI UIFTF QVU PQUJPOT FYQJSJOH XPSUIMFTT CFDBVTF JU NFBOT
UIBU UIFJS PWFSBMM QPSUGPMJP IBT HPOF VQ JO WBMVF "T BO PQUJPOT USBEFS
ZPV
DBO TFMM QVUT XJUI UIF JOUFOU PG UBLJOH BEWBOUBHF PG UIJT BOE BDU MJLF BO JO
TVSBODF DPNQBOZ JO B TFOTF

.PTU SFUBJM USBEFST BSF HPJOH UP CF VTJOH CJOBSZ PQUJPOT XJUI BO BUUFNQU
UP QSFEJDU EJSFDUJPO 5IJT JT KVTU UIF OBUVSF PG UIF SFUBJM USBEFS .PTU PG UIFN

The Volatility Short Trading Rules 247

BSF MPPLJOH UP NBLF B MBSHF SFUVSO XJUI B TNBMM JnWFTUNFOU JO B TIPSU QFSJPE
PG UJNF 8IFO VTJOH B QSFNJVN DPMMFDUJPO TUSBUFHZ
ZPV BSF FTTFOUJBMMZ UBL
JOH UIF PQQPTJUF TJEF PG UIFTF SFUBJM USBEFST CZ GPSFDBTUJOH XIFSF UIF VOEFS
MZJOH JOTUSVNFOU XJMM OPU HP

5IF CFBVUZ CFIJOE B SBOHF WPMBUJMJUZ TIPSU TUSBUFHZ JT UIBU ZPV EPO U
IBWF UP QSFEJDU XIFSF BO JOTUSVNFOU XJMM HP :PV TJNQMZ OFFE UP QSFEJDU
XIFSF JU XJMM OPU HP 5IJT HJWFT ZPV NBOZ NPSF PQQPSUVOJUJFT UP CF DPSSFDU

'PS FYBNQMF
XIFO NBLJOH B EJSFDUJPOBM USBEF VTJOH UIF VOEFSMZJOH JO
TUSVNFOU
UJNF JT OPU BO JTTVF CVU ZPV IBWF UP QSFEJDU XIFSF UIF JOTUSVNFOU
XJMM HP *G UIF JOTUSVNFOU TUBZT XIFSF JU TUBSUFE PVU
ZPV XJMM MPTF JG JU HPFT
against you, you will also lose.

8JUI B EJSFDUJPOBM PQUJPO TUSBUFHZ
BMM PG UIF BCPWF QBSBNFUFST BSF BMTP
USVF CVU OPX UJNF JT BMTP XPSLJOH BHBJOTU ZPV 4P OPU POMZ EP ZPV IBWF UP
QSFEJDU XIFSF UIF VOEFSMZJOH JOTUSVNFOU XJMM HP
CVU BMTP ZPV IBWF UP QSF
dict when it will get there.

8JUI TIPSU WPMBUJMJUZ USBEJOH
ZPV TJNQMZ OFFE UP QSFEJDU XIFSF BO JO
TUSVNFOU XJMM OPU HP 4P JG UIF JOTUSVNFOU HPFT JO ZPVS GBWPS
ZPV XJO JG JU
HPFT B MJUUMF CJU BHBJOTU ZPV
ZPV BMTP XJO BOE JG JU TUBZT XIFSF JU JT
ZPV BMTP
XJO 5IF POMZ UJNF ZPV MPTF JT XIFO UIF JOTUSVNFOU HPFT JOUP BO BSFB XIFSF
ZPV GPSFDBTUFE UIBU JU XPVME OPU HP

5IJT NFBOT UIBU ZPVS EJSFDUJPOBM BOBMZTJT EPFT OPU IBWF UP CF OFBSMZ
as accurate with volatility short trading as it does with directional trading.
"OE UIJT JT B HPPE UIJOH TJODF NPTU EJSFDUJPOBM BOBMZTJT JT OPU BDDVSBUF JO
general.

)BWJOH B GFFM GPS UIF HFOFSBM EJSFDUJPO PG UIF NBSLFU JT B HPPE JEFB OP
NBUUFS XIBU UZQF PG WPMBUJMJUZ TUSBUFHZ ZPV BSF USBEJOH *G ZPV IBWF UIJT GFFM

ZPV DBO TLFX ZPVS USBEFT PS TUBHHFS JOUP ZPVS USBEFT JO B XBZ UIBU DBO DP
JODJEF XJUI UIF NBSLFU USFOE BOE BUUFNQU UP QVU UIF PEET JO ZPVS GBWPS -FU T
UBLF B MPPL BU TPNF CBTJD UFDIOJDBM BOE GVOEBNFOUBM TUSBUFHJFT UIBU ZPV
DBO VTF UP HFU BO JEFB PG NBSLFU EJSFDUJPO XIFO USBEJOH B WPMBUJMJUZ TIPSU
TUSBUFHZ BOE EJTDVTT IPX ZPV DBO NPEJGZ ZPVS WPMBUJMJUZ TIPSU CJOBSZ PQUJPO
spreads based on your analysis.

Support/Resistance Analysis

5IF åSTU UZQF PG BOBMZTJT UIBU ZPV DBO EP JT CBTJD UFDIOJDBM BOBMZTJT 5IJT JO
DMVEFT USFOE MJOFT
TVQQPSU SFTJTUBODF
CJH åHVSFT
'JCPOBDDJ MFWFMT
PS DIBSU
QBUUFSOT TVDI BT IFBE BOE TIPVMEFST
EPVCMF CPUUPNT
BOE EPVCMF UPQT

:PV EPO U IBWF UP EP IJHIĄFOE BOBMZTJT IFSF
BOE XF BSF OPU HPJOH UP
HFU JOUP JOĄEFQUI EJTDVTTJPO PG UIF UFDIOJDBM DPODFQUT 5IFZ BMM DBO CF
GPVOE JO WJSUVBMMZ BOZ UFDIOJDBM BOBMZTJT CPPL 5IF JEFB JT UIBU ZPV DBO
use basic technical analysis to fine‐tune your volatility short binary op
tion spreads.

248 BINARY OPTIONS

-FU T MPPL BU TPNF FYBNQMFT
-FU T BTTVNF UIBU ZPV BSF QMBOOJOH UP NBLF B WPMBUJMJUZ TIPSU TQSFBE
XJUI TUSJLF QSJDFT BU MFBTU QFSDFOU BXBZ GSPN NBSLFU QSJDF XIFO UIF 4 1
GVUVSFT BSF USBEJOH BU
&YIJCJU EFQJDUT B LFZ TVQQPSU MFWFM BU UIF DSJUJDBM QSJDF [POF
5IJT TVQQPSU MFWFM IBT CFFO IFBWJMZ SFTQFDUFE BOE XJMM NPTU MJLFMZ DPOUJOVF
to repel price.

Price

Market Price 1320

Support 1300

EXHIBIT 16.16 Key Support Levels and the Probability of Change

:PV OPUJDF UIBU UIFSF JT B TUSPOH TVQQPSU MFWFM BU :PV BMTP LOPX
UIBU JT B CJH åHVSF
XIJDI BDUT MJLF B UPVHIFS MFWFM UP CSFBDI #JH åH
VSFT BSF TJNQMZ SPVOE OVNCFS QSJDFT FOEJOH JO [FSP PS åWF 1TZDIPMPHJ
DBMMZ
UIFZ BSF UPVHIFS UP CSFBDI UIBO SFHVMBS OVNCFST

6OEFS OPSNBM DPOEJUJPOT
ZPV XPVME CF CVZJOH ZPVS JOĄUIFĄNPOFZ PQ
UJPO QFSDFOU BXBZ GSPN NBSLFU QSJDF 5ISFF QFSDFOU GSPN JT
QPJOUT BXBZ 5IFSFGPSF
ZPV XPVME CF MPPLJOH UP CVZ UIF TUSJLF
QSJDF )PXFWFS
TJODF ZPV TFF B TVQQPSU MFWFM BU
ZPV DBO EFDJEF UP
CVZ B CJU DMPTFS BOE DPMMFDU NPSF QSPåU JG ZPV BSF DPSSFDU 'PS FYBNQMF
ZPV
DBO EFDJEF UP CVZ UIF TUSJLF QSJDF JOTUFBE PG UIF

5IFSF BSF PUIFS XBZT UP IBOEMF UIJT TJUVBUJPO 'PS FYBNQMF
JG ZPV EF
DJEF UP FOUFS CPUI MFHT PG UIF USBEF BOZXBZ ZPV NBZ XBOU UP FOUFS NPSF
DPOUSBDUT PO UIF MPOH MFH UIBO UIF TIPSU MFH 5IJT JT DBMMFE skewing the
trade. *G ZPV UZQJDBMMZ FOUFS åWF DPOUSBDUT QFS MFH
ZPV NBZ DPOTJEFS EPJOH
TJY PO UIF MPOH TJEF BOE POMZ UISFF PO UIF TIPSU TJEF

Another way to handle this situation is to enter the long leg sooner
UIBO FOUFSJOH UIF TIPSU MFH *G ZPV QMBO UP CF USBEJOH XFFLMZ CJOBSJFT XJUI
this approach, you would buy the long contracts on Monday and wait to see

The Volatility Short Trading Rules 249

what will happen to the underlying, and then only enter the short leg once
NBSLFU EJSFDUJPO JT FTUBCMJTIFE

5IFTF TJNJMBS UBDUJDT DBO CF QFSGPSNFE XJUI PUIFS UFDIOJDBM TUVEJFT
TVDI BT USFOE MJOFT
'JCPOBDDJ MFWFMT
BOE FWFO NPWJOH BWFSBHF TVQQPSU BS
FBT 5IF MFWFM PG BHHSFTTJWFOFTT JO NPWJOH ZPVS PQUJPO TUSJLF QSJDFT
TFMMJOH
FBSMJFS
PS TLFXJOH UIF OVNCFS PG DPOUSBDUT UIBU ZPV QMBO UP USBEF EFQFOET
PO ZPV BOE ZPVS SJTL BQQFUJUF

Contrarian Analysis

"T ZPV NBZ SFDBMM GSPN UIF QSFWJPVT TFDUJPO
ZPV OFFE UP USBEF VOEFSMZJOH
JOTUSVNFOUT UIBU BSF MJLFMZ UP SFWFSU UP UIF NFBO 3FWFSUJOH UP UIF NFBO
NFBOT UIBU XIFO BO JOTUSVNFOU NBLFT B TJHOJåDBOU NPWF JO B TQFDJåD EJ
SFDUJPO
JU CPVODFT CBDL JO UIF PUIFS EJSFDUJPO

8JUI BO JOTUSVNFOU UIBU UFOET UP SFWFSU UP UIF NFBO
B MBSHF NPWF JO
POF EJSFDUJPO JT VTVBMMZ GPMMPXFE CZ B MBSHF NPWF JO UIF PUIFS EJSFDUJPO
*G ZPV HFU JOUP B WPMBUJMJUZ TIPSU TQSFBE PO UIF XSPOH TJEF PG POF PG UIFTF
NPWFT
ZPV DBO HFU ZPVSTFMG JOUP USPVCMF GBJSMZ RVJDLMZ "U UIF TBNF UJNF

ZPV DBO VTF UIFTF NPWFT UP TLFX ZPVS USBEFT UP ZPVS BEWBOUBHF

-FU T MPPL BU TPNF FYBNQMFT UP GVSUIFS DMBSJGZ UIJT DPOUSBSJBO DPODFQU
-FU T BTTVNF UIBU UIF 4 1 GVUVSFT BSF USBEJOH BU
CVU UIFZ IBWF
HPOF VQ CZ UP QFSDFOU GPS UIF QBTU UISFF XFFLT JO B SPX :PV BMTP SFBMJ[F
UIBU UIF 4 1 GVUVSFT BSF CFMPX UIF ĄXFFL NPWJOH BWFSBHF BOE UIF PWFS
BMM USFOE BOE NBSLFU TFOUJNFOU BSF EPXO :PV NBZ EFDJEF UIBU UIF NBSLFU
JT PWFSFYUFOEFE UP UIF VQTJEF
&YIJCJU EFQJDUT BO FYUFOEFE VQXBSE NPWF CFMPX UIF ĄQFSJPE
NPWJOH BWFSBHF
-FU T TBZ UIBU PODF BHBJO ZPVS WPMBUJMJUZ TIPSU TUSBUFHZ JT EFTJHOFE GPS
ZPV UP UBLF CJOBSZ PQUJPO USBEFT QFSDFOU BXBZ GSPN UIF NBSLFU QSJDF PG
UIF VOEFSMZJOH 5IFSFGPSF
BU ZPV XPVME CF MPPLJOH UP NBLF USBEFT BU

Market Price Price
1310

EXHIBIT 16.17 Upward Movement

250 BINARY OPTIONS

MFBTU QPJOUT BXBZ GSPN UIF NBSLFU QSJDF 5IF PQUJPO UIBU ZPV XPVME
TFMM XPVME IBWF B TUSJLF QSJDF PG BU MFBTU
BOE UIF PQUJPOT UIBU ZPV
XPVME OPSNBMMZ CVZ TIPVME IBWF B TUSJLF QSJDF PG PS MPXFS

#BTFE PO UIF GBDU UIBU ZPV BSF TFFJOH UIF NBSLFU PWFSFYUFOEFE UP UIF
VQTJEF
ZPV NBZ EFDJEF UP TFMM UIF PVUĄPGĄUIFĄNPOFZ B MJUUMF DMPTFS UP UIF
NBSLFU QSJDF 4JODF ZPV BSF FYQFDUJOH B ESPQ JO UIF QSJDF PG UIF VOEFSMZJOH

ZPV NBZ EFDJEF UP FJUIFS OPU CVZ UIF JOĄUIFĄNPOFZ PQUJPO BU BMM PS UP CVZ JU
B CJU GBSUIFS BXBZ JG UIFSF BSF TUSJLF QSJDFT BWBJMBCMF

'PS FYBNQMF
JG UIF 4 1 GVUVSFT BSF USBEJOH BU
ZPV DBO TFMM UIF
PVUĄPGĄUIFĄNPOFZ PQUJPO BU JOTUFBE PG BOE CVZ UIF JOĄUIFĄNPOFZ
PQUJPO BU PS JOTUFBE PG

&YIJCJU EFQJDUT UIF 1 - PG HPJOH MPOH B CJOBSZ PQUJPO BOE TIPSU
B CJOBSZ PQUJPO 5IF YĄBYJT SFQSFTFOUT UIF QSJDF PG UIF VOEFSMZJOH
BOE UIF
ZĄBYJT SFQSFTFOUT UIF 1 - *G BU FYQJSBUJPO UIF VOEFSMZJOH IBT DMPTFE CFMPX
UIF TIPSU QPTJUJPO BOE PS BCPWF MPOH QPTJUJPO
UIF USBEFS XJMM QSPåU

Profit 400 1270 1340
300 binary option binary option
200

100 Price of
0 Underlying
(S&P futures)
–100

–200 Current market
–300 (= 1310)

Loss –400

EXHIBIT 16.18 P&L Graph of a Short Volatility Binary Option Trade

"OPUIFS UIJOH ZPV DBO EP JT UP XBJU GPS UIF NBSLFU UP FTUBCMJTI EJSFD
UJPO CFGPSF FOUFSJOH UIF PQUJPO QPTJUJPO PG XIFSF ZPV UIJOL UIF NBSLFU XJMM
HP 'PS FYBNQMF
JO UIJT DBTF ZPV DBO TFMM UIF PVUĄPGĄUIFĄNPOFZ PQUJPO SJHIU
BXBZ CVU XBJU GPS UIF NBSLFU UP ESPQ BOE FTUBCMJTI DMFBS EJSFDUJPO CFGPSF
CVZJOH UIF JOĄUIFĄNPOFZ PQUJPO

:PV DBO BMTP TLFX UIFTF USBEFT XJUI UIF OVNCFS PG DPOUSBDUT UIBU ZPV
USBEF *O UIF FYBNQMF NFOUJPOFE IFSF
ZPV XPVME TFMM NPSF PVUĄPGĄUIFĄNPO
FZ PQUJPO DPOUSBDUT UIBO ZPV XPVME CVZ JOĄUIFĄNPOFZ PQUJPO DPOUSBDUT

)FSF BSF B GFX LFZ UIFPSJFT UP LFFQ JO NJOE BCPVU UIJT UZQF PG BOBMZTJT
'JSTU
UIJT BOBMZTJT XPSLT JO CPUI VQXBSE BOE EPXOXBSE NPWFT 4P ZPV DBO
JNQMFNFOU JU JG ZPV GFFM UIBU UIF NBSLFU JT PWFSFYUFOEFE UP UIF VQTJEF PS UP
the downside.

"EEJUJPOBMMZ
JU JT WFSZ JNQPSUBOU UP CF DBSFGVM XJUI UIJT BQQSPBDI :PV
EPO U XBOU UP CVZ PS TFMM PQUJPOT SFBMMZ DMPTF KVTU CFDBVTF ZPV GFFM UIF

The Volatility Short Trading Rules 251

NBSLFU JT FYUFOEFE 8JUI UIF 4 1 GVUVSFT
JU T B HPPE JEFB GPS UIF NPWFT JO B
TQFDJåD EJSFDUJPO UP CF EVSJOH NVMUJQMF QFSJPET PO UIF DIBSU 'PS FYBNQMF

JG ZPV BSF MPPLJOH BU EBJMZ NPWFT
ZPV XJMM XBOU UP TFF UISFF UP åWF EBZT PG
B NPWF JO UIF TBNF EJSFDUJPO 8JUI XFFLMZ DIBSUT
B NPWF PWFS UXP UP GPVS
XFFLT JO B SPX NBZ CF TVGåDJFOU

"OPUIFS LFZ BTQFDU IFSF JT UIBU ZPV XBOU UP QBZ BUUFOUJPO UP OFXT BO
OPVODFNFOUT BOE FDPOPNJD EBUB SFMFBTFT UIBU XJMM BGGFDU UIF VOEFSMZJOH
JOTUSVNFOU *G UIFSF JT B NBKPS BOOPVODFNFOU MJLF UIF GFEFSBM GVOET SBUF
PS UIF OPOGBSN QBZSPMM EVSJOH UIF XFFL
ZPV TIPVME CF NPSF DBSFGVM BOE
OPU NPEJGZ ZPVS USBEF CBTFE PO KVTU UFDIOJDBM BOBMZTJT "U UIF TBNF UJNF

PQUJPO QSPåUBCJMJUZ XJMM CF BWBJMBCMF GBSUIFS BXBZ GSPN UIF NBSLFU EVSJOH
UIPTF UJNFT
TP ZPV XJMM CF BCMF UP CVZ JOĄUIFĄNPOFZ PQUJPOT BOE TFMM PVU PG
UIF NPOFZ PQUJPOT GBSUIFS BXBZ GSPN NBSLFU QSJDF BOE TUJMM TUBOE UP DPMMFDU
TVGåDJFOU SFUVSOT PO ZPVS USBEFT

Rolling Out

5IF DPOUSBSJBO BOBMZTJT DBO CF UBLFO FWFO POF TUFQ GVSUIFS XIFO ZPV JN
QMFNFOU UIF QSJODJQMFT PG SPMMJOH PVU 3PMMJOH PVU JT BO BQQSPBDI XIFSF ZPV
CBTJDBMMZ BMXBZT FYQFDU UIF VOEFSMZJOH JOTUSVNFOU UP TOBQ CBDL BOE SFWFSU
UP UIF NFBO JO B TIPSU UJNF GSBNF

5IF XBZ UP SPMM PVU JT UP BDUVBMMZ OPU DVU ZPVS USBEFT BOE UBLF PO B MPTT
#VU PODF ZPV UBLF PO UIF MPTT
ZPV XJMM FOUFS UIF TBNF USBEF GPS UIF GPMMPX
JOH UJNF QFSJPE XJUIPVU DIBOHJOH UIF TUSJLF QSJDF

-FU T MPPL BU BO FYBNQMF UP DMBSJGZ UIJT DPODFQU -FU T BTTVNF UIBU UIF
4 1 GVUVSFT BSF USBEJOH BU BOE ZPV TFMM B PVU PG UIF NPOFZ PQ
UJPOT XJUI UIF IPQF UP DPMMFDU B QSFNJVN 5IF DPMMBUFSBM UIBU ZPV XJMM
QVU VQ PO UIF USBEF JT

&YIJCJU JT BO PQUJPO DIBJO PG 64 CJOBSZ PQUJPOT
-FU T BTTVNF UIBU BT TPPO BT ZPV FOUFS UIF USBEF UIF QSJDF PG UIF 4 1
GVUVSFT TIPPUT VQ UPXBSE BOE BDUVBMMZ DMPTFT UIF XFFL PVU BU
8JUI B SPMMJOHĄPVU TUSBUFHZ
ZPV XPVME OPU DVU UIF USBEF *OTUFBE
ZPV
XPVME TJNQMZ TFMM UIF PQUJPO BHBJO OFYU XFFL /PX UIJT PQUJPO XJMM
CF JO UIF NPOFZ BOE UIF QSFNJVN PO JU NBZ CF :PV XPVME OFFE UP QVU
VQ DPMMBUFSBM PG UP FOUFS UIF USBEF *G UIF NBSLFU TOBQT CBDL BOE NPWFT
EPXO OPX
ZPV XPVME DPMMFDU PO UIF PQUJPO BOE UIJT XPVME NBLF
VQ GPS QBSU PG UIF MPTT UIBU ZPV JODVSSFE
:PV DBO FWFO DPNCJOF B DVUPGG TUSBUFHZ XJUI B SPMMJOHĄPVU TUSBUFHZ -FU T
EFNPOTUSBUF IPX UIJT XPSLT XJUI UIF TBNF FYBNQMF /PX BT UIF NBSLFU
NPWFT BHBJOTU ZPV
MFU T BTTVNF UIBU ZPV EFDJEF UP DVU ZPVS USBEF SBUIFS UIBO
TUBZ JO JU BMM UIF XBZ VOUJM FYQJSBUJPO -FU T BTTVNF UIBU ZPV DVU ZPVS USBEF
XIFO UIF 4 1 GVUVSFT BSF BU BOE UIF QSJDF PG UIF CJOBSZ PQUJPO UIBU ZPV
TPME JT BU :PV XPVME MPTF PO UIF USBEF XIFO ZPV DVU ZPVS USBEF PGG
/PX ZPV DBO XBJU GPS OFYU XFFL BOE TFMM ZPVS PQUJPO BHBJO -FU T PODF
BHBJO BTTVNF UIBU UIF 4 1 GVUVSFT XJMM CF USBEJOH BU :PV XPVME TFMM