Binary Options Strategies for Directional and Volatility

252 BINARY OPTIONS

Contract Bid Offer
Daily US 500 (Mar) > 1380 2.1 5
Daily US 500 (Mar) > 1375 4.5 7
Daily US 500 (Mar) > 1370 8 10
Daily US 500 (Mar) > 1365 17 20
Daily US 500 (Mar) > 1360 20 24
Daily US 500 (Mar) > 1355 36.1 40.1
Daily US 500 (Mar) > 1350 48.1 51.6
Daily US 500 (Mar) > 1345 60.1 63.1
Daily US 500 (Mar) > 1340 71.2 73.9
Daily US 500 (Mar) > 1335 75.8 77.4
Daily US 500 (Mar) > 1330 80 84
Daily US 500 (Mar) > 1325 90.2 93.4
Daily US 500 (Mar) > 1320 95.4 98.4

EXHIBIT 16.19 Binary Option Chain

UIF PQUJPO GPS B QSFNJVN PG *G UIF NBSLFU EPFT NPWF EPXO
ZPV
DBO DPMMFDU UIF QSFNJVN PO UIF PQUJPO BOE BDUVBMMZ NPSF UIBO
NBLF VQ GPS ZPVS MPTT GSPN UIF QSFWJPVT XFFL

/FFEMFTT UP TBZ
ZPV TIPVME CF FYUSFNFMZ DBSFGVM XJUI UIJT BQQSPBDI
*G UIF NBSLFU NBLFT B TUSPOH NPWF JO POF EJSFDUJPO
ZPV NBZ FOE VQ FY
QFSJFODJOH MPTT BGUFS MPTT
XIJDI DBO FWFOUVBMMZ FBU VQ ZPVS BDDPVOU 0ODF
BHBJO
UIF EFDJTJPO PG XIFUIFS UP JNQMFNFOU UIJT TUSBUFHZ TIPVME TUSPOHMZ
EFQFOE PO ZPVS SJTL BQQFUJUF BOE UPMFSBODF

Overall Trend Analysis

6OMJLF PUIFS USBEJOH TZTUFNT
XIFO VTJOH B WPMBUJMJUZ TIPSU BQQSPBDI
ZPV
EP OPU OFFE TQFDJåD UFDIOJDBM PS GVOEBNFOUBM QBSBNFUFST JO PSEFS UP FOUFS
ZPVS USBEF BOE QSFEJDU EJSFDUJPO 5IF LFZ XJUI B WPMBUJMJUZ TIPSU TZTUFN JT UP
put every possible edge on your side.

0OF XBZ UP EP UIJT JT UP EFUFSNJOF UIF PWFSBMM NBSLFU USFOE 5IJT
TIPVME OPU CF B TVCKFDUJWF BOBMZTJT TJODF ZPV EP OPU XBOU UP HFU JOUP B TJUV
BUJPO XIFO ZPV BSF KVTUJGZJOH BO FNPUJPOBM USBEF *OTUFBE
UIJT TIPVME CF BO
PCKFDUJWF BOBMZTJT 8JUI BO PCKFDUJWF BOBMZTJT
ZPV OFFE UP EFUFSNJOF IPX
ZPV XJMM EFUFSNJOF USFOE

" TJNQMF XBZ UP EP UIJT XPVME CF UP VTF B NPWJOH BWFSBHF :PV DBO
JODPSQPSBUF B NPWJOH BWFSBHF åMUFS JOUP ZPVS IJTUPSJDBM BOBMZTJT PG UIF NBH
OJUVEF PG UIF NPWFT PG UIF VOEFSMZJOH JOTUSVNFOU -FU T MPPL BU UIF UBCMF
BHBJO 4FF &YIJCJU

EXHIBIT 16.20 Daily 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% 7.34% 5.02% 3.09%
percentage: 2 5.41% 10.42% 15.06% 22.39% 22.01% 11.58% 4 2 1
3 5 10 28 26 11
1/8/2007– # of weeks: 0.78% 1.55% 0.78% 0.39%
1/8/2002 3 13 3 2

percentage: 1.16% 1.16% 1.94% 3.88% 10.85% 10.08% 4.26% 5.04% 1.16% 0.78%
15 5 13 19 41 51 24 36 18 11
1/7/2002– # of weeks:
1/7/1997 1.94% 4.65% 2.32% 1.42%

percentage: 15 1.94% 162.50% 7.36% 15.89% 19.77% 9.30% 36 18 11
1.71% 22 45 68 127 134 65 4.10% 2.05% 1.25%
Total: # of weeks:
2.84% 5.81% 8.77% 16.39% 17.29% 8.39%
percentage:

1/7/1997–
1/9/2012

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

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

253

254 BINARY OPTIONS

"T BO FYBNQMF
MFU T BOBMZ[F B QFSDFOU EPXOXBSE NPWF #BTFE PO
&YIJCJU
UIJT NPWF IBQQFOFE QFSDFOU PG UIF UJNF *G ZPV QVMM VQ
IJTUPSJDBM EBUB
ZPV DBO EFUFSNJOF XIBU QFSDFOU PG UIF UJNF UIF NPWF IBQ
QFOFE XIFO UIF NBSLFU XBT BCPWF UIF ĄXFFL NPWJOH BWFSBHF BOE XIBU
QFSDFOUBHF PG UIF UJNF TVDI B NPWF IBQQFOFE XIFO UIF NBSLFU XBT CFMPX
UIF ĄXFFL NPWJOH BWFSBHF

5IF JOĄEFQUI EBUB GPS UIF 4 1 NPWFT DBO CF GPVOE PO XXX USBE
FSTDIPJDFPQUJPOT OFU 5IJT SFTFBSDI XBT QVSQPTFMZ PNJUUFE GSPN UIF CPPL
BT ZPV TIPVME EP JU PO ZPVS PXO BOE UFTU WBSJPVT JOTUSVNFOUT BOE NPWJOH
BWFSBHFT 0ODF BHBJO
UIF MFWFM PG B åMUFS SFBMMZ EFQFOET PO ZPVS SJTL BQ
QFUJUF 4PNF QFPQMF BSF QFSGFDUMZ åOF VTJOH WFSZ TUSJDU åMUFST BOE FOUFSJOH
UP USBEFT QFS ZFBS UP DBQUVSF POMZ B QFSDFOU BOOVBM SFUVSO "U UIF TBNF
UJNF
PUIFS QFPQMF XBOU UP USBEF FWFSZ EBZ BOE FBSO QFSDFOU QFS ZFBS
0G DPVSTF
UIF MBUUFS PQUJPO IBT B IJHIFS SJTL UIBO UIF GPSNFS POF

5IFSF BSF UXP GBDUPST UP DPOTJEFS XIFO QFSGPSNJOH UIJT UFTU 'JSTU
EPO U
PWFSPQUJNJ[F UIF EBUB UFTU POMZ NBKPS NPWJOH BWFSBHFT 0WFSPQUJNJ[BUJPO
XPSLT XFMM POMZ XJUI IJTUPSJDBM EBUB *U JT CFTU UP VTF UIF NBKPS BWFSBHFT MJLF
UIF

BOE FYQPOFOUJBM NPWJOH BWFSBHFT &."
PS TJNQMF NPWJOH
BWFSBHFT 4."
5FTU UIFN PVU BOE TFF XIJDI POFT XPSL CFTU 0ODF BHBJO

UIF JEFB IFSF JT OPU UP åOE UIF QFSGFDU FOUSZ CVU UP QVU UIF PEET JO ZPVS GBWPS

0ODF ZPV EFUFSNJOF XIBU ZPV CFMJFWF UP CF UIF PWFSBMM USFOE
ZPV DBO
JNQMFNFOU UIF TBNF QSJODJQMFT JO ZPVS USBEJOH :PV DBO NPEJGZ UIF EJTUBODF
GSPN UIF NBSLFU QSJDF
UIF OVNCFS PG DPOUSBDUT
BOE UIF UJNF GSPN FYQJSB
UJPO XIFO ZPV NBLF ZPVS USBEF

Staggering Into Your Trade

.BOZ USBEFST MJLF UP CBTF UIFJS JOJUJBM EFDJTJPO PO TPNF LJOE PG B DBUBMZTU
and start their trade with only one leg in a volatility short spread.

'PS FYBNQMF
XIFO USBEJOH XFFLMZ PQUJPOT PO .POEBZ PS FBSMZ PO
5VFTEBZ
ZPV NBZ åSTU FOUFS UIF USBEF CBTFE PO XIBU ZPV CFMJFWF UP CF ZPVS
GPSFDBTUFE EJSFDUJPO 'PS FYBNQMF
JG ZPV TFF B TUSPOH SFTJTUBODF BSFB JO UIF
NBSLFU UIBU UIF VOEFSMZJOH JT BQQSPBDIJOH
UIFO ZPV XPVME TFMM POMZ PVUĄ
PGĄUIFĄNPOFZ PQUJPOT JOJUJBMMZ 0ODF B EBZ QBTTFT BOE UIF NBSLFU BEKVTUT

ZPV XPVME FOUFS CPUI MFHT PG UIF USBEF CBTFE PO UIF QSPQFS EJTUBODF PG
ZPVS USBEJOH TZTUFN
UIBU JT
QFSDFOU 0ODF BOPUIFS EBZ QBTTFT
ZPV XPVME
FOUFS ZPVS USBEF BHBJO 5IF JEFB IFSF JT UP TUBHHFS JOUP ZPVS USBEF PWFS UIF
DPVSTF PG UIF XFFL SBUIFS UIBO FOUFS BMM BU PODF

-FU T MPPL BU BO FYBNQMF PG IPX ZPV XPVME EP UIJT -FU T PODF BHBJO BT
TVNF UIBU ZPV BSF USBEJOH UIF 4 1 GVUVSFT BOE UIBU UIFZ BSF USBEJOH BU
-FU T BMTP BTTVNF UIBU ZPV OPUJDF B TUSPOH TVQQPSU BSFB BU 'JOBMMZ

MFU T BTTVNF UIBU ZPVS BDDPVOU BOE SJTL NBOBHFNFOU TFUUJOHT BMMPX GPS ZPV
UP USBEF DPOUSBDUT QFS MFH BOE ZPV QMBO UP TFMM PQUJPOT BU MFBTU QFSDFOU
BXBZ GSPN NBSLFU QSJDF 4FF &YIJCJU

The Volatility Short Trading Rules 255

EXHIBIT 16.21 Staggered Trade Entry Strike Price
3% away from
Day of the Week Leg 1 Leg 2 market if available
3% away from
Day 1 50% (catalyst) 0% market if available
N/A
Day 2 50% 100%

Expiration Expiration Expiration

" XBZ UP IBOEMF UIJT TUSBUFHZ JT UP HFU JOUP POMZ UIF MPOH MFH PG ZPVS
USBEF PO .POEBZ XJUI POMZ UISFF DPOUSBDUT -FU T BTTVNF UIBU PO .POEBZ
UIF QSJDF PG UIF 4 1 GVUVSFT NPWFT EPXO UP /PX ZPV XPVME FOUFS
JOUP NPSF DPOUSBDUT PO 5VFTEBZ CVU UIJT UJNF ZPV XBOU UP CF QFSDFOU
BXBZ GSPN SBUIFS UIBO 4P PO 5VFTEBZ ZPV XPVME HFU JOUP UISFF
NPSF DPOUSBDUT BU
BOE OPX ZPV DBO BMTP TFMM UISFF DPOUSBDUT BCPWF
BU 0G DPVSTF
ZPV XPVME FOUFS UIF USBEF POMZ JG UIFSF BSF PQUJPOT
available at those price points.

-FU T BTTVNF UIBU PO 8FEOFTEBZ UIF 4 1 GVUVSFT NPWF VQ JO QSJDF UP
/PX ZPV DBO CVZ UIF SFNBJOJOH GPVS JO UIF NPOFZ DPOUSBDUT BU
QFSDFOU CFMPX NBSLFU QSJDF
BOE ZPV DBO TFMM UXP UP UISFF NPSF DPO
USBDUT BU /PUJDF UIBU ZPV TIPVME CF NPSF DBSFGVM XJUI UIF PVUĄPGĄUIFĄ
NPOFZ PQUJPOT TJODF ZPVS JOJUJBM BOBMZTJT GPSFDBTUFE BO VQXBSE NPWF

*G BMM HPFT XFMM
CZ FYQJSBUJPO OPOF PG UIF TUSJLF QSJDFT XJMM CF CSFBDIFE
*G UIFZ BSF CSFBDIFE
ZPV XJMM OPU IBWF UP DVU ZPVS FOUJSF QPTJUJPO BOE TUJMM
NBZ FOE VQ CFJOH QSPåUBCMF PO ZPVS USBEF

5IF BEWBOUBHF UP UIJT LJOE PG BQQSPBDI JT UIBU ZPV BSF NPSF ýVJE XJUI
UIF NBSLFU XIFO TFUUJOH ZPVS TUSJLF QSJDFT 5IF EJTBEWBOUBHF JT UIBU UIFSF
NBZ OPU CF FOPVHI QSFNJVN QSPåU BWBJMBCMF PO ZPVS MBUUFS FOUSZ EBZT
5IFSFGPSF
UIF TZTUFN JT B CJU NPSF DPOTFSWBUJWF UIBO KVTU HFUUJOH JOUP ZPVS
trade all in one day.

RULE 7: ATTEMPT TO MAKE YOUR MARKET

"T QSFWJPVTMZ EJTDVTTFE
CJOBSZ PQUJPOT IBWF BO FOUSZ DPNNJTTJPO DPTU
BO
FYJU DPNNJTTJPO DPTU
BOE B TFUUMFNFOU GFF UIBU XJMM CF DIBSHFE POMZ JG ZPV
are profitable. Additionally, binary options will have a spread between the
CJE BOE UIF BTL QSJDF PG FBDI PQUJPO

Also, as we previously discussed, the idea when trading binary options
JT UP QVU BMM PG UIF PEET JO ZPVS GBWPS 0OF XBZ UP EP UIJT JT UP DPOTJTUFOUMZ
USZ UP HFU B CFUUFS åMM UIBO XIBU T BWBJMBCMF PO UIF PQUJPOT DIBJO 'PS FYBN
QMF
JG ZPV BSF USZJOH UP CVZ BO JOĄUIFĄNPOFZ PQUJPO BOE UIF CJE PGGFS QSJDJOH
JT CZ
USZ UP HFU JO UIF NJEEMF PG UIBU TQSFBE BOE QVSDIBTF BU

256 BINARY OPTIONS

5IF XBZ UP EP UIJT JT CZ QMBDJOH B MJNJU PSEFS XIFO ZPV FOUFS UIF USBEF
5IJT JT FTQFDJBMMZ FGGFDUJWF XIFO ZPV BSF OPU JO BO FYUSFNF IVSSZ UP HFU JO
:PV DBO UISPX B GFX MJNJU PSEFST VQ BOE IPQF UP HFU åMMFE

'PS FYBNQMF
JG ZPV BSF USBEJOH B XFFLMZ TUSBUFHZ PO .POEBZ
ZPV DBO
CF WFSZ BHHSFTTJWF XJUI ZPVS MJNJU PSEFST :PVS CVZ PSEFST DBO CF PO UIF
CJE
BOE ZPVS TFMM PSEFST DBO CF PO UIF PGGFS *G ZPV EPO U HFU JO CZ 5VFTEBZ

JO UIF NPSOJOH ZPV DBO HFU B MJUUMF MFTT BHHSFTTJWF XJUI ZPVS PSEFST 'PS
FYBNQMF
ZPV DBO QMBDF UIFN SJHIU JO CFUXFFO UIF TQSFBE

*G ZPV TUJMM EPO U HFU JO CZ 5VFTEBZ BGUFSOPPO
ZPV DBO GVMMZ FBTF VQ BOE
EP XIBUFWFS JU UBLFT UP HFU JOUP UIF USBEF *G ZPV OFFE UP
ZPV DBO CVZ BU UIF
BTL BOE TFMM BU UIF CJE

"MUIPVHI UIJT BQQSPBDI XJMM UBLF B MJUUMF NPSF UJNF
JU DBO SFBMMZ BEE
VQ PWFS B TVCTUBOUJBM OVNCFS PG USBEFT
FTQFDJBMMZ XIFO UIF CJOBSZ PQUJPO
TQSFBET BSF IJHI 8IFUIFS UP JNQMFNFOU UIJT TUSBUFHZ JT SFBMMZ B RVFTUJPO PG
IPX NVDI UJNF ZPV IBWF UP BMMPDBUF UP UIJT BQQSPBDI

CONCLUSION

"SF ZPV SFBEZ UP TUFQ JOUP UIF CJOBSZ PQUJPOT USBEJOH XPSME "U UIF WFSZ
MFBTU
OPX ZPV TIPVME LOPX UIF CBTJDT
TVDI BT XIBU JOTUSVNFOUT UIF PQ
UJPOT BSF USBEFE PO BOE IPX UIFZ XPSL :PV TIPVME CF BCMF UP NBLF CBTJD
EJSFDUJPOBM USBEFT BOE VOEFSTUBOE IPX UIF DPODFQUT PG DPMMBUFSBM BOE TFU
UMFNFOU XPSL 5P UBLF UIJOHT VQ B MFWFM
ZPV TIPVME LOPX IPX WPMBUJMJUZ
MPOH BOE TIPSU TQSFBET XPSL BOE IPX UP DPNCJOF UIFN XJUI CBTJD NBSLFU
analysis.

'JOBMMZ
JU JT UJNF UP DSFBUF ZPVS PXO TUSBUFHZ )PQFGVMMZ
UIJT CPPL IBT
MBJE PVU UIF HSPVOE SVMFT "T ZPV DBO TFF
ZPV OFFE UP QMBO GPS ZPVS USBE
JOH
LOPX ZPVSTFMG
BOE EFTJHO ZPVS TZTUFN XJUI ZPVSTFMG JO NJOE 8JUI BMM
UIJT TBJE
ZPV BCTPMVUFMZ NVTU IBWF BOE BEIFSF UP B TUSPOH SJTL BOE NPOFZ
NBOBHFNFOU QMBO

*G UIJT JT OPU FOPVHI
CZ SFBEJOH UIF MBTU TFDUJPO
ZPV TIPVME HFU UIF JEFB
PG UIF CBTJDT PG WPMBUJMJUZ TIPSU USBEJOH ,OPXO BT QSFNJVN DPMMFDUJPO JO UIF
WBOJMMB PQUJPO XPSME
UIJT BQQSPBDI DBO CF DBSSJFE PWFS UP CJOBSZ PQUJPOT 0G
DPVSTF
UIFSF BSF BEWBOUBHFT BOE EJTBEWBOUBHFT PG WPMBUJMJUZ TIPSU USBEJOH
XJUI CJOBSJFT 5IF CJHHFTU BEWBOUBHF JT UIBU UIF EJTBTUFS GBDUPS SJTL JT HPOF
TJODF CJOBSZ PQUJPOT BSF GVMMZ DPMMBUFSBMJ[FE BOE ZPV DBO OFWFS MPTF NPSF
UIBO ZPV QVU JO OP NBUUFS IPX ESBTUJDBMMZ UIF NBSLFU NPWFT BHBJOTU ZPV

*G ZPV EPO U MJLF WPMBUJMJUZ TIPSU USBEJOH
UIFSF BSF QMFOUZ PG PUIFS TUSBUF
HJFT UIBU ZPV DBO JNQMFNFOU XJUI CJOBSZ PQUJPOT %JE ZPV FWFS USZ UP MPPL
GPS UFDIOJDBM USFOET JO FDPOPNJD EBUB SFMFBTFT 5IF QPTTJCJMJUJFT BSF MJUFSBMMZ
FOEMFTT "OE XJUI POMZ BT TNBMM BNPVOU PG NPOFZ OFDFTTBSZ UP TUBSU USBEJOH
UIJT QSPEVDU
KVTU BCPVU BOZPOF DBO EJWF SJHIU JO BOE FOKPZ UIF FYDJUJOH SJEF

The Volatility Short Trading Rules 257

KEY POINTS: PART 7

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

t Premium collection is a method of trading in which you bet on an underly-
ing instrument staying within a certain range. This strategy is based on
the idea of normal distribution, which suggests that an instrument is most
likely to be at the same price at the beginning and end of a time interval.

t Binary options make this strategy more effective by limiting the potential
losses.

t In order to manage risk, it is best to cut any losses at a certain percentage
of potential gains.

t It is also essential to ensure that the range that you speculate the instru-
ment will stay within is wide enough that you collect enough premium to
cover commissions, bid‐ask spreads, and risk of losses.

t The distance that your strike prices should be from the market price is a
function of many things, including your cutoff parameters, market volatil-
ity, and option premiums.

t When using premium collection strategies, it is best to speculate on under-
lying instruments that have a tendency to hold toward a mean price rather
than trend.

t It is best to use binary options with less duration in volatility short trading,
as this minimizes exposure to extreme movements in the market.

t When using volatility short trading systems, it is in your interest to do
extra research to get an idea of where it is going/where it is not going in
order to increase profitability.

t You can use basic technical analysis (identifying trends, resistance or sup-
port levels, patterns, etc.) to adjust your volatility short spreads and in-
crease returns.

t Contrarian analysis (betting on the market reversing a recent trend) can
also be used to adjust volatility short spreads and boost returns.

t Staggering into trades involves entering each leg in your volatility short
spread separately (and possibly even with multiple trades per leg) over the
first few days of a week. This conservative approach decreases risk by mak-
ing your trade more fluid with the market but can also reduce your returns.

t A final way to increase profitability on volatility short spreads is to use
limit orders to attempt to buy in‐the‐money at a price lower than the ask
and sell out‐of‐the‐money at a price higher than the bid.

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

Glossary

At‐the‐Money The strike price of an option contract and the price of the underly-
ing asset on which the option is based are at the same level.
Bid The current price to sell an option.
Binary Option Also known as digital options or all‐or‐nothing options. They are
a type of options derivative. Binary options can be considered a yes‐or‐no proposi-
tion—either the event happens or it does not.
Buying Volatility Speculation that the underlying asset will make a large move
without necessarily picking direction.
Call A call option gives the owner the right to purchase the underlying instrument
at a particular price (known as the strike price) any time before expiration.
Ceiling Also known as the maximum gain, or the most you can profit on a binary
option trade.
Collateral The amount of money a trader will need to provide in order to trade
a binary option. If the trader’s assumption is correct, the trader will be given back
the collateral plus profit.
Commission Fees charged by a broker or exchange to trade.
Commodity Physical goods, such as oil, corn, or gold.
Commodity Future Futures contracts that can be used to speculate or hedge on
various physical commodities.
Contract A trading unit for a derivative instrument. Binary options are traded in
contracts.
Currency Pair Currencies are always quoted in pairs, such as GBP/USD or USD/
JPY. The reason they are quoted in pairs is that in every foreign exchange transac-
tion, you are simultaneously buying one currency and selling another.
Daily Expiration Contracts that expire at the end of the trading day. Daily binary
options expire each day at 4:15 P.M. EST.
Directional Trading Speculating on whether an underlying market will go up
or down.
Economic Event A report released by a government agency that depicts a
specific part of the economy.
Expiration The point at which a contract is no longer tradable.

259

260 GLOSSARY

Floor Also known as the maximum risk, or the most you can lose on a binary
option trade.

Futures A contract that says that the buyer or seller will purchase or sell a spe-
cific asset for a specific price at a specific time in the future.

Hedging Using options, futures, or binary options to protect the value of a cor-
responding asset class that is either owned or currently being traded.

Historic Volatility The actual volatility of a financial instrument over a given
period of time.

Implied Volatility The estimated volatility of a security’s price. In general, im-
plied volatility increases when the market is bearish and decreases when the mar-
ket is bullish.

In‐the‐Money In‐the‐money means that an option contract is worth money. If a
trader buys a binary option and the underlying asset is above the strike price of the
binary, the binary is in‐the‐money. If a trader sells a binary option and the underly-
ing asset is below the strike price of the binary, the binary is in-the-money.

Intraday Contracts that expire throughout the day. With intraday binary options
you can choose from binaries that expire at 11 A.M., 12 P.M., 2 P.M., and 4:15 P.M.
EST. These options expire within a trading day.

Leg An options term that refers to one side of a spread transaction. For instance,
a trader might buy a call option that has a particular strike price and expiration
date, then combine it with a put option that has the same strike price and a different
expiration date. The two options are called legs of the spread.

Limit Order A type of pending order.

Long Position Buying a particular asset class. With binary options trading, tak-
ing a long position means speculating that an underlying asset will settle above the
binary option’s strike price.

Long Volatility A binary option strategy that consists of buying a binary option
with a strike price above an underlying asset’s market price and also selling a binary
option with a strike price below the underlying asset’s market price. Long volatility
strategies are used when an assumption is made that an underlying asset will move
in one direction or another.

Margin Funds that are required to trade vanilla options and futures. Typically, the
amount of margin required is a small percentage of the overall contract cost. When
trading on margin, a trader is using a small amount of money to control a larger
amount of an asset class.

Maximum Loss The most money that can be lost on a binary option trade.

Maximum Profit The most money that can be made on a binary option trade.

Natural Market Consensus The general consensus of all market participants
currently trading in a particular asset class.

Offer The current price to buy an option. Also known as the “ask” price.

Option Chain A list of the available option strike prices on a particular
underlying asset.

Glossary 261

Option Delta A parameter of the option that depicts its sensitivity to the price
movement of the underlying market on which the option is based.

Option Spread An option strategy that involves buying and selling multiple options.

Out-of-the-Money Out‐of‐the‐money means that an option contract is not worth
money. If a trader buys a binary option and the underlying asset is below the strike
price, the binary is out‐of‐the‐money. If a trader sells a binary option and the under-
lying asset is above the strike price, the binary is out‐of‐the‐money.

Price Quote How the value of an asset class is displayed. The bid and offer are
shown side by side in a binary option quote. Example: 30 bid/33 offer.

Put A put option gives the owner the right to sell the underlying instrument at an
agreed-upon price (the option’s strike price) any time before expiration.

Selling Volatility Speculating that the underlying asset will remain in a certain
range by expiration.

Settlement Fee Fees charged by a broker if a binary option is held until
expiration.

Settlement Value The price of a binary option contract at expiration.

Short Position Selling a particular asset class. With binary options trading, tak-
ing a short position means speculating that an underlying asset will settle below the
binary option’s strike price.

Short Volatility An option strategy that consists of selling a binary option with
a strike price above an underlying asset’s market price and also buying a binary op-
tion with a strike price below the underlying asset’s market price. Short volatility
strategies are used when an assumption is made that an underlying asset will stay
within a range.

Speculation Attempting to profit from forecasting the movements of an asset.

Spot Forex The abbreviation for the foreign exchange, or currency, market. The
forex market is considered a spot market. A spot market is any market that deals in
the current price of a financial instrument. Retail spot forex is traded via forex‐deal-
ing firms and banks.

Stock Index A basket of stocks that is constructed to reflect and track a particu-
lar market or sector.

Stock Index Future Futures contracts based on a variety of global and domestic
stock indexes. They can be used to speculate on the price direction of a stock market
index or hedge (protect) against a sudden price decrease of a portfolio of stocks.

Strangle An options strategy involving buying or selling options with different
strike prices that will profit if the underlying asset remains in a tight range or moves
outside of the range. With binary options, to go long strangle, you would sell a strike
price lower than the market price, and you would buy a strike price higher than the
market price. To go short strangle, you would buy the strike price lower than the
market price and sell the strike price higher than the market price.

Strike Price The true or false condition relative to the underlying market. More
simply put, the strike price is your price target to be achieved or not achieved based
on your position (long or short).

262 GLOSSARY

Time Decay The relationship of an options price relative to the amount of time
until it expires.

Time Value The amount of time until expiration. An option with more time until
expiration has a higher chance of being settled in‐the‐money than an option with
less time until expiration.

Traditional (Vanilla) Option Derivative instruments that are exchange traded.
An option gives the owner the right to buy or sell the underlying instrument at a par-
ticular price. Options are traded on various instruments such as individual stocks,
futures, currencies, and indexes.

Underlying Asset The asset on which a binary option contract is based. Example:
US 500 binary option is based on the S&P 500 futures.

Volatility Trading Speculating on whether the volatility of an underlying market
will increase or decrease. Volatility trading means that you are not trying to predict
a direction in the market. You are simply speculating whether the market will stay
in a certain range or will come out of the range in either direction.

Weekly Expiration Contracts that expire each trading week. Weekly binary op-
tion contracts expire Friday at various times throughout the day, depending on the
underlying asset.

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

Index

Account breakdown, 221 Back-testing Binary option price
Account distribution, danger, 161 behavior, demonstration, 125
difficulty, 158 market consensus, 32–34
diversification results, example, 216 minimum/maximum, 44e
(relationship), 220 rules, 162–163 time until expiration,
Asset classes, binary option relationship, 31e
availability, 3–10 Bid, definition, 259
Assets, news releases (impact), Bid/offer, 76 Binary options
139e–140e, 149e–150e Bigger losses strategy, 169–171 advantages/disadvantages,
At-the-money, definition, 259 Big wins strategy, 171–174 13–14
At-the-money binary option Binary, term (meaning), 19 flowchart example, 7e
trade Binary option chain, 33 list, 14e
data points, 50e, 58e asset class availability, 3–10
profit and loss (P&L) graph, collateral level, 52e, 54e asset presence, 12
49e, 57e contract example, 60e assumption, 9
At-the-money gold binary contrarian analysis, 251–252 availability, 5, 242
option daily US 500 example, 194e behavior, expiration
entry breakdown, 96 example, 36e, 46e, 89e (approach), 123
example, 96–97 expiration, time (duration), benefits, 202–206
exit breakdown, 97 binary nature, 155
rationale, 96 34e, CBOE (Vanilla) put/call
At-the-money long trade futures, 118e options, contrast, 10–13
collateral reading, 34–38 collateralization, 13, 201
entry breakdown, 49 US 500 binary options, completion, 43
example, 49 collateral requirement, 13
rationale, 49 example, 191e components, 20–22
At-the-money long trade US 500 data, 124e, 126e consideration, 25
settlement Binary option condition currency pair availability, 8
entry breakdown, 63 depiction, 36e definition, 1, 259
example, 63–64 expiration, relationship, 84e, depiction, expiration
exit breakdown, 63 (impact), 125e
rationale, 63 87e, 89e, 93e derivative instruments,
At-the-money option, purchase morning sale, 92e meaning, 44
(example), 125 purchase, 83e, 89e drawdown, calculations, 213e
At-the-money short collateral sale, 86e percentage terms, 214e
entry breakdown, 56 Binary option contract example, 204–205
example, 56–58 collateral, 43 exit strategy, 189–190
rationale, 56 exit, 87–94 expiration, 21–22
At-the-money short settlement expiration value, 45e approach, 125
entry breakdown, 70 behavior, 13
example, 70–71 strike price trade, 65 price, behavior, 14
exit breakdown, 70 long, collateral requirement, probability, 35
rationale, 70 timing, 124–125
Automated system, trading, 214 48, 49 values, 44–45
losses, minimization, 87–94
sale, premium collection, 51
trading, 71–72

expiration/settlement,

relationship, 95
value behavior, 32e

263

264 INDEX

Binary options (continued) time value, 30–32 usage, 159
fixed risk and reward, 12 representation, 31e trading, 134–138
fundamental trading time until expiration, 193e Buying volatility
strategies, 139 definition, 259
going long, profit and loss, traditional options, contrast, long strangle, definition, 108
112, 113e 12–13 Buy order, depiction, 161,
in-the-money consideration,
24 usage, 107 161e
intuitive pricing, 14 value, 44
jump, 92 volatility trading, 15 Call, definition, 259
long, P&L graph, 37e Binary option trades, 9. See Call options contracts, 10
long strangle, profit and loss CCI approach, 220
(P&L) graph, 201e also Economic events Ceiling, definition, 259
long trades, settlement, collateral table, 121e Chicago Board Options
59–71 data points, 188e, 189e
order types, 78e entry, 75 Exchange (CBOE)
payout odds, 36e vanilla put/call
at-the-money level, 37e breakdown, 82–83 options, binary options
in-the-money level, 38e exit, 75, 78–81 (contrast), 10–13
out-of-the-money example, Chicago Mercantile Exchange
37e breakdown, 83, 85 (CME)
payouts at expiration, commissions, 78–79 expiring/exercised vanilla
202–203 profit, locking in, 82–85 put/call options study,
position, collateralization. expiration 226
See Long binary options example, 204 S&P futures data, usage
position. exit, 79 (example), 158
pricing, 29 exit timing, 81–94 Collateral, 120–121
profit, 66 losing, 79–80 definition, 259
purchase, 135 winning, 80–81 explanation, 44
example, 203 long position, 82 level. See Binary option
puts/calls, absence, 13, 95 entry breakdown, 82–83, chain; Binary option
quotes, reading, 75–76 contract.
retail trader action, 246–247 88 requirement, 54. See also
risk, limitation, 14 example, 88–91 Binary options.
sale, 244–246 exit breakdown, 83, 90 table, 71, 73e
example, 203 maximum loss/profit, 121e Commissions, 71–73
short trade settlement, commissions, breakdown, 73e
formula, 65 definition, 259
mechanics, 50–58 78–79 requirements, 79e
settlement, 63–67 short position, 85 Commodity, definition, 259
small contract size, 14 Commodity futures, 5–7
spread, risk management, entry breakdown, 85 definition, 259
190–199 exit breakdown, 86–87 pricing, 5
strangle, profit and loss Binary option trading, 31 Conditional stop (trade exit
(P&L) graph, 200e advantage, 13 tactic), 177
strategies collateralization, 44 Consecutive losing trades,
back-testing, 158–161 expiration, trading 215–216
creation, 153 Consecutive trade cutoff,
strike price, 20–21 correctness, 95 problems, 216
effect, 33e keys/examples, 95 Contracts
expiration, instrument reasons, 14–15 definition, 259
(impact), 51e safety, 200 trade settlement, receiving,
instrument, impact, 52e strike price, impact, 20 81
systems, usage, 155 Blackjack, edge (example), 156 value, binary option
technical trading strategies, Breakout behavior, 32e
129 binary options, usage, Contracts for differences
(CFDs), 158
134–135 Contrarian analysis, 249–251
chart, 159e
strangle trade

example, 136–138
rationale, 136
trade entry, 136
trade exit, 136–137
strategy
problems, 159–160

Index 265

binary option chain, 252e Deep-out-of-the-money option, definition, 259
rolling out, 251–252 sale, 226 short binary option trade
Copper binary option
at-the-money example Delta data points, 148e
binary option chain, P&L graph, 148e
rationale, 101 examples, 124e, 126e Economic releases, impact, 141
Copper binary options option price, relationship, Emotions
127t control, 166, 167
at-the-money example, 101 price, relationship, 127 impact, 165
entry/exit breakdowns, 101 understanding, 123–127 justification (process), 166
Eurex Dax futures (Germany
chain, 100e Directional analysis, 247
in-the-money example, 98–100 Directional option strategy, 30), 5
EUR/USD
entry/exit breakdowns, 100 246–247
rationale, 100 Directional systems, 246 binary options, option chain,
long in-the-money binary Directional trading, definition, 204, 204e

option trade 259 cross, 161
data points, 102e Disaster factor protection, 201 increase, assumption, 206
P&L graph, 101e Diversification. See Intersystem
short at-the-money binary movement, chart, 206e
diversification pair, trading level (example),
option trade account distribution,
data points, 103e 141, 160–161
P&L graph, 102e relationship, 220 trading level, example, 8
short out-of-the-money Dow Futures (Wall Street Event. See Price
Exchange and option
binary option trade 30), 5
data points, 98e Downtrend, consequences, 162 clearinghouses, trading
P&L graph, 98e Drawdown, 184. See also considerations, 12
Copper binary options, Expiration, 21–22
System definition, 259
examples, 99–103 analysis, five percent loss discipline, 206–207
Copper futures, 6 time/date, 76
Corn futures, 6 (example), 185e winning, 80–81
Crude oil futures, 6 analysis, two percent loss Exponential moving averages
Currency pairs (EMA), 254
(example), 184e
binary option availability, 8 approach, maximum Fear, emotion, 166
definition, 259 danger, 211
quotes, 7 consecutive trade impact, 165
Cutoff ratio, impact, 234 approach (combination),
Cutoff strategy, rolling out 216 Federal funds rate
calculation, 212. See also binary option trades, 9
strategy (combination), Binary options. economic data release,
251–252 historical/back-tested speculation, 149
drawdown, 214–215
Daily binary options, 22 trade-by-trade calculation, Fees, 71–73
Daily expiration, definition, 259 214 breakdown, 73e
Daily S&P 500 futures, five-year Drawdown maximum
cutoff, presence, 218 Floor, definition, 260
intervals, 245e, 253e factors, 214–215 Forecast, example, 141
Data setting, 218–219 Forex, 158
Duration, impact, 244–246 FTSE (Liffe FTSE 100 futures),
overoptimization, avoidance,
163 Economic calendar, example, 5
142e Futures
range, back-testing, 163
size, back-testing, 162–163 Economic data, position commodity futures, 5–7
Debt risk. See Vanilla options/ control, 202 contracts, speculation

futures Economic data releases, 8–10 (example), 4
Deep-in-the-money option position, 200 definition, 260
speculation, 149–150 derivatives, 158
delta, level, 123 explanation, 3–4
entry/exit breakdowns, 170 Economic events, 8 margin/debt risk, 43–44
purchase, example, 169–171 binary option trade, 147–148 stock index futures, 4–5
rationale, 169 rationale, 147 trading benefits, 3–4
sale, 226 trade entry/exit, 147
trade, problem, 170

266 INDEX

Germany 30 (Eurex Dax In-the-money short settlement data points, 61e, 171e
futures), 5 entry breakdown, 68 profit and long (P&L) graph,
example, 68–70
Gold binary options exit breakdown, 68 61e, 170e
chain, 96e rationale, 68 Long leg
examples, 96–98
Intraday, definition, 260 entry, 248–249
Gold daily OHLC chart, 129e Intraday binary options, 21–22 potential breach, cutoff, 233
Gold futures, 6 Long out-of-the-money, 22
Japan 225 (Nikkei 225 futures), binary option, 23e
decline, 180 5
option chains, 244e data points, 63e
trading price, 6 Jobless claims trade, profit and loss (P&L)
Greed, emotion, 166 economic binary option
danger, 211 trades, 9 graph, 62e, 178e
impact, 165 report, position (example), 9 Long position

Hard dollar stop, usage, 186 Justification (process), 166 definition, 260
Hedging, definition, 260 profit and loss, graphical
High volatility, option chain, Korea 200 (KOSPI 200 futures),
5 representation, 118e,
243e 230e, 236e
Historical data, analysis, 243 KOSPI 200 futures (Korea Long put, profit and loss (P&L)
Historic volatility, definition, 200), 5 graph, 12e
Long strangle (buying
260 Leg, definition, 107, 260 volatility), definition, 108
Liffe FTSE 100 futures Long trade
Implied volatility, definition, collateralization, 45–49
260 (FTSE), 5 logic, short volatility, 114
Limit order, definition, 260 making, 45
Indicators Live account, progression, 163 Long trading, 22–24
collinearity, 157 Long at-the-money, 24 Long vanilla put trade, profit
example, 157e and loss, 11
on/off indicator, binary option, 24e Long volatility
requirement, 158 binary option trade binary option trade
data points, 111e, 137e–138e,
Intersystem diversification, data point, 64e, 98e 143e–144e
220–221 profit and loss (P&L) graph, P&L graphs, 109e, 110e,
112e, 113e, 137e, 143e
In-the-money, definition, 260 64e, 97e definition, 260
In-the-money binary option Long binary options entry breakdown, 108–109
example, 108–110
purchase, 178–181 position, collateralization, exit breakdown, 109
decision, example, 161 45–46 rationale, 108
entry/exit breakdowns, 180 trade, profit and loss (P&L)
In-the-money long collateral profit and loss (P&L), graph, 174e, 227e
entry breakdown, 46 vanilla call option Losses
example, 46–47 (relationship), 124e consecutive losses, 184
rationale, 46 minimization, 87–94, 169–175
summary, 47 Long binary options trade strategy. See Bigger losses
In-the-money long settlement data points, 47e, 85e, 90e, strategy.
entry breakdown, 60 181e Lower strike price breach,
example, 60–61 early exit, data points, 91e short volatility, 115
exit breakdown, 60 example, 82–85, 88–91 Low volatility, option chain, 243e
rationale, 60 exit breakdown, 90
In-the-money option contract expiration payout, P&L Manual system, trading, 214
graph, 80e Margin. See Vanilla options/
purchase, example, profit & loss (P&L) graph,
189–190 47e, 180e futures
In-the-money option purchase, definition, 260
248 Long call, profit and loss (P&L) Market
attempt, 255 graph, 11e direction, 247
In-the-money short collateral
entry breakdown, 55 Long in-the-money, 22 establishment, 250
example, 55–56 Long in-the-money binary
rationale, 55
option, 23e
payout, 80e
Long in-the-money binary

option trade

Index 267

edge, discovery, 155–156 definition, 260 Out-of-the-money long
making, 255–256 example, 21e, 30e collateral
movement, 111 maximum profit/loss, 68e
US 500 binary option, entry breakdown, 47
presidential election, impact, example, 47–48
144 example, 191e rationale, 47
Options Out-of-the-money long
price, sales, 240–242
trend, determination, 252 contracts settlement
volatility, control, 199–202 bid and ask price, change, entry breakdown, 62
Maximum dollar loss, 33 example, 62
function, explanation, 10–11 exit breakdown, 62
determination, 186–187 rationale, 62
Maximum drawdown cutoff delta, definition, 261 Out-of-the-money option, delta
expiration date exercise, 11
example, 219e in-the-money settling, 194 level, 123
presence, 218 price, delta (relationship), Out-of-the-money short
Maximum loss, 120–121
definition, 260 127t collateral
formula, 65 sale, 244–246 entry breakdown, 53
Maximum profit, 120–121 spread, 107 example, 53–55
definition, 260 rationale, 53
summary table, 71, 73e definition, 261 Out-of-the-money short
Maximum risk/reward, short risk management, 190–199
time value settlement
volatility, 115 representation, 31e entry breakdown, 67
Mean, reversion, 242–244 time until expiration, 193e example, 67–68
Momentum, indicator, 157 types, 10 exit breakdown, 68
Moving average convergence/ Order ticket rationale, 67
asking price, 77 Out-of-the-money 1260 binary
divergence (MACD), contract information, 76
problems, 163 details, 77 options, 205–206
Moving averages example, 77e trade, data points, 205e
problems, 163 reading, 76–78 Overbought/oversold,
upward movement, 249e stop order, placement, 78
Multisystem trading graph, types, 78e indicator, 157
220e Out-of-the-money, definition,
Payout
NASDAQ futures (US Tech 261 move, size (impact), 111e
100), 5 Out-of-the-money binary regulation, strike prices
(usage), 110–113, 116–120
Natural gas futures, 6 options
Natural market consensus, sale, 226 Payout odds
trade at-the-money level, 37e
definition, 260 basis, 35
Negative emotions, 165 data points, 48e, 207e in-the-money level, 38e
entry/exit breakdown, 178 out-of-the-money level, 37e
control-168, 166 profit & loss (P&L) graph, probabilities, 36e
mitigation, 175–181
reduction, 168 48e Physical gold, price
News releases, 139–144 Out-of-the-money gold binary (speculation example), 4
impact, 139e–140e,
option Political events, 144–146
149e–150e entry breakdown, 97 Political instability, volatility
speculation, 147–148 example, 97–98
strangle, example, 141–144 exit breakdown, 97–98 short trade, 144–146
Nikkei 225 futures (Japan rationale, 97 rationale, 144
Out-of-the-money long binary short volatility binary option
225), 5
Nonfarm payrolls option trade trade
data points, 173e data points, 146e
binary options trades, 9 entry/exit breakdown, 172 P&L graph, 145e
economic data release, examination, 171 trade entry, 145
profit and loss (P&L) graph, trade exit, 145
speculation, 149 Position size
172e calculation, example, 187
Offer, definition, 260 rationale, 172 determination, 185–190
Option chains risk, reduction, 173 volatility long trades, 190–195

daily US 500 example, 194e

268 INDEX

Political instability (continued) target, 219 assumptions, 188
volatility short trades, volatility, usage, 223 collateralization, 49–50
195–199 Put, definition, 261
Put/call options, 125 maximum loss, 53
maximum dollar loss, Put option contracts, 10–11 data points, 67e, 179e, 1983
determination, 186–187 early exit, data points
Quotes. See Binary options
trade, example, 187–188 bid/offer, 76 losses, cutting, 94e
trading, data points, 204e expiration time/date, 76 profits, locking in, 88e
trading psychology, strike price, 75 examples, 85–87, 188–189
underlying asset/market, 75 expiration payout, P&L
relationship, 199
usage, 203 Range regulation, strike prices graph, 81e
Premium availability, 194e (usage), 116–120 profit and loss (P&L) graph,
Premium collection, 53,
Reinvestment rule, 216–219 66e, 179e
226–231 examples, 217–219 settlement, understanding,
entry breakdown, 227–228
exit breakdown, 228–229 Resistance, 160e 64
analysis, 247–249 short position, 91–94
lower strike price breach, support, relationship, Short binary options trading
228 130–134
position
maximum risk, 228 Return on investment (ROI), entry breakdown, 91
upper strike price breach, increase, 159 example, 91–94
exit breakdown, 92–93
228 Reward/risk ratio Short collateral, examples, 53
maximum reward, 228 approach, 169 Short in-the-money, 24–25
normal distribution curve, minimum, determination, binary option, 25e
239
226e short volatility, 115 payout, 80e
option chains, high/low binary option trade
Risk amount, determination,
volatility, 235e 186 data points, 57t, 71e
option graphical profit and loss (P&L) graph,
Risk management, 183
representation, 236e calculator, availability, 187 56e, 70e
rationale, 227 impact, 156 Short leg potential breach,
reward risk ratio, 229 process, 184–185
short volatility binary option cutoff, 233–234
Rolling out, 251–252 Short out-of-the-money, 25
trade, profit and loss strategy, cutoff strategy Short out-of-the-money binary
(P&L) graph, 229e (combination), 251–252
strategy, 225 option, 26e
total collateral, 228 Russell 2000 Futures (US trade
trade Smallcap 2000), 5
example, 227–231 data points, 55e, 69e
long trade logic, 228 Selling volatility profit and loss (P&L) graph,
short trade logic, 228 definition, 261
transaction costs, 237e short strangle, 113–116 54e, 69e
President, election (market definition, 108 Short position
movement), 144
Price. See Strike prices Settlements, 59 definition, 261
behavior, 32–33 fee, definition, 261 profit and loss
event value, definition, 261
market participant view, 33e graphical representation,
occurrence, expiration Short at-the-money, 27 118e, 230e, 236e
event, 32 binary option, 26e
market consensus, 32–34 binary option trade representation, 65
movement, speculation, 43 data points, 72e Short strangle (selling
quote, definition, 261 profit and loss (P&L), 72e
Proactive system volatility), definition, 108
improvement, 211 Short binary options Short trades
Profits settlement, 63–64
improvement, 169–175 collateral, formula, 53
reinvestment, 217–218 Short binary options trade. See logic, short volatility, 114
Economic events maximum loss/profit, 65e
Short trading, 24–27
Short volatility
definition, 261
entry breakdown, 114
example, 113–116
exit breakdown, 115

Index 269

long-trade logic, 114 Standard & Poor’s 500 resistance, relationship,
lower strike price breach, (S&P500) 130–134

115 futures (US 500), 5 System
maximum reward, 115 speculation, 119 account breakdown, 221
maximum risk, 115 amount, back-testing, 158
rationale, 113 movement, data, 254 back-testing, 160
reward/risk ratio, 115 normal distribution curve, success, 220
short-trade logic, 114 cutoffs, 212
spread, profit and loss (P&L) 118e development. See Trading.
Stock index, definition, 261 discovery, 168–175
graph, 196e Stock index futures, 4–5 drawdown, 212–215
total collateral, 114 expectancy, calculation,
upper strike price breach, binary options, availability, 5 156
contracts, trading, 4 historical/back-tested
115 Stocks, derivatives, 158 drawdown, 214–215
Short volatility binary option Stop-loss (trade exit tactic), life cycle, 211
losses, 239
trade 176–177 performance, 168
data points, 117e, 135e Stop-loss, underlying basis proactive improvement, 211
questions, 168
premium collection, (trade exit tactic), 177 robustness, 157–158
Stop-loss strategy, example, success, 168
229e–230e trade expectancy, 168
profit and loss (P&L) graphs, 180–181 formula, 168–169
Stop order, placement, 78 trading. See Volatility.
114e, 116e, 119e, 120e, Strangle, 135. See also Vanilla usage. See Binary options.
134e weekly system, back-testing,
contrarian analysis, 250e options 162–163
definition, 261
premium collection, 229e news example, 141–144 Take-profit (trade exit tactic),
Silver futures, 6 profit and loss (P&L) graph. 176
Simple moving average (SMA),
See Binary options. Technical breakout
254 rationale, 141 downside, 134, 136e
Small losses strategy, 171–174 Strangle trade, 190 upside, 136e
Small wins strategy, 169–171 entry, 141
Soybean futures, 6 exit, 141, 143 Technical trading strategies,
Speculation, definition, 261 Strike prices, 20–21, 29–30 129
Spot Forex, 7–8 analysis, 240
availability, 20, 29, 50, 88, 91 Time decay, 32
definition, 261 definition, 262
Spreads range, 34–35
breach, trading action, 240 Time stop (trade exit tactic),
approach, 173 definition, 261 177
losses, 239 market price, relationship,
positions, cutting, 195 Time value, 30–32
Spreads at expiration, 121e 95 consideration, 30–31
Staggered trades, 254–255 movement, 126 definition, 262
entry, 255e observation, 21 representation, 31e
Standard & Poor’s (S&P) quotes, 75
time until expiration, impact, Total collateral
futures amount, usage, 193
closing, 66 33 short volatility, 114
market price, 240 trading, 33
options, 245 underlying, relationship, 45 Traders
price chart, example, 84e usage, 110–113 analysis, problems, 166
price movement, 255 worth, 32, 33 emotions, impact, 165
speculation, 112 Success probability impatience, 211
trading level, example, 169, losses, reasons, 175
(regulation), strike parameters, creation, 167
177, 249 prices (usage), 110–113
usage, 243 Support, 160e Trades. See Consecutive losing
Standard & Poor’s (S&P) analysis, 247–249 trades
buy order level, 161e
futures, trading, 4–5 graphical representation,
level, 34, 35, 51 248e
level, example, 169e
assumptions, 52–53
trade entry, 59

270 INDEX

accuracy (reduction), cutoff Trend-following system, short position, taking
ratio (usage), 234 success, 220 (selling volatility),
113–116
entry, 176 Twenty percent rule, 215
exit, 176–178 Two percent rule, 183 short spread compensation,
expectancy. See System. Tzu, Sun, 167 formula, 231

formula, 168–169 Underlying short strategy
expiration, exit, 79 asset/market, quotes, 75 construction, 243–244
impact, 254–255 instruments, usage, 242–244 design, 250
long leg, 235 movement, 194 function, determination,
loss price, 227 226–227

determination, 215–216 Underlying asset, definition, short system
reduction, 231–234 262 creation, binary options
normal distribution curve, (usage), 225
Upper strike price breach trading, 242
174, 175e percentage level, 239
profit short volatility, 115 short trading rules, 225
analysis, 246–255
assumption, 213 Upside, technical breakout,
exit, 216–217 136e spread, exit value
reward/risk ratio, 112 (examination), 195
risk, amount, 191 Uptrend, depiction, 162e
skewing, 248 Upward trend, depiction, 162, trading, 107
staggering, 254–255 definition, 262
entry, 255e 162e
Trading U.S. jobless claims, forecast Volatility long trades
account, risk level, 193 data points, 192e
amount, back-testing, 158 (example), 141 option chains, 194e
concept, data points, 204e US SmallCap 2000 (Russell position size, determination,
example, 217 190–195
graph. See Multisystem 2000 futures), 5 premium, availability, 194e
US Tech 100 (NASDAQ
trading graph. Volatility short trades. See
indicator collinearity, 157 Futures), 5 Political instability
psychology US 500 (S&P 500 futures), 5
legs, success, 196
binary options, benefits, option chains, 244e maximum risk, 196
202–206 position size, determination,
Vanilla options
impact, 156 long strangle, 201e 195–199
position size, relationship, margin/debt risk, 43–44 profit and loss (P&L) graph,
strangle, 200e
199 traditional option, definition, 196e
questions, 166 262 short binary option trade,
volatility, 43
Trading system, 246 Vanilla put/call options data points, 198e
assumptions, 167 binary options, contrast, spread, rationale, 197
creation, requirement, 10–13 trade breakdown, 197
premium collection, 53 trade loss, determination,
175–176 puts, purchase, 246
development, 156–158 usage, 43 197
historic results, absence, 185 Volume, indicator, 157
initiation, 199 Volatility
pyramid collateralization, control. See Market. Wall Street 30 (Dow Futures),
cyclicality, 242 5
221e indicator, 157
return, potential, 215 long position, taking (buying Weekly binary options, 22
twenty percent rule, 215 volatility), 108–110 strike prices, observation, 21
Traditional option (vanilla long spread
approach, 194 Weekly expiration, definition,
option), definition, 262 exit, decision, 195 262
Transaction costs, 237 long strategy, problems,
Trend 201 Weekly S&P 500 futures,
long system, trading, 200 five-year intervals, 232e,
analysis, 252, 254 profit, 223 238e, 241e
indicator, 157
Weekly system, back-testing,
162–163

Wins, number (increase),
169–175