Managing Risk with the SP 500 at New Highs
This week the S&P 500 (^GSPC:SNP) has seen a low volume, “thin to win,” melt-up to higher prices. During this morning’s Globex session, the ESU4 has been trading at all-time contract highs and is currently trading at 1985.00.
While this trader believes that more upside remains, I also consider that the S&P 500 (ESU14:CME) is up nearly 100 handles in just about two weeks, and at least a small amount of profit-taking could occur before prices trade higher. Watching this week’s price action has seen an orderly move higher with resistance being found at the average high of day from the last 30 days.
Today I will be using binary options to capitalize on my market view. Nadex offers binary options that are subjected to CFTC regulation, so I know that the structure and pricing is going to be consistent and fair.
Nadex offers hourly, daily and weekly expirations based on several instruments including US and international indexes as well as metals, agriculture and forex products.
The diversity of products and expirations allow me many possibilities when choosing a strategy and risk/reward profile that suits my view.
Today I will be taking a look at the US 500 (Sep) 1992.00 daily binary option. At the time of this writing the market price is $20.00; I like selling this option at a price of $50.00.
My risk to the trade is limited to the cost of entering this trade which is $50.00. My potential profit is the difference in the $100 payout and the $50.00 cost of the trade which leaves me with $50.00, meaning that my potential reward on risk is 100%.
This binary option is based on the price of the ESU4 which is currently trading at 1985.00 . What I need to reach the maximum profit is for the ESU4 to close today at 4:15 below 1992.00.
Obviously the futures markets can be very volatile but using the binary options offered by Nadex limits my risk to the premium paid at the time the trade is first initiated, so my stop loss is already built in.
I only chose to look at a single binary strike but there are many strikes listed on Nadex, each having different risk/reward scenarios.
Remember, if your trade starts working in your favor or against, you have the option to liquidate early, but at expiration, only one party (buyer/seller) can receive the $100 and the other nothing.
FairValue Trader
