U.S. Markets closed
  • S&P 500

    3,768.25
    -27.29 (-0.72%)
     
  • Dow 30

    30,814.26
    -177.24 (-0.57%)
     
  • Nasdaq

    12,998.50
    -114.10 (-0.87%)
     
  • Russell 2000

    2,123.20
    -32.15 (-1.49%)
     
  • Crude Oil

    52.37
    +0.01 (+0.02%)
     
  • Gold

    1,838.50
    +8.60 (+0.47%)
     
  • Silver

    25.14
    +0.27 (+1.08%)
     
  • EUR/USD

    1.2089
    +0.0006 (+0.0484%)
     
  • 10-Yr Bond

    1.0970
    -0.0320 (-2.83%)
     
  • Vix

    24.34
    +1.09 (+4.69%)
     
  • GBP/USD

    1.3595
    +0.0008 (+0.0585%)
     
  • USD/JPY

    103.7000
    +0.0130 (+0.0125%)
     
  • BTC-USD

    36,515.34
    -49.60 (-0.14%)
     
  • CMC Crypto 200

    711.42
    -23.72 (-3.23%)
     
  • FTSE 100

    6,720.65
    -15.06 (-0.22%)
     
  • Nikkei 225

    28,516.88
    +274.67 (+0.97%)
     

Friday The 13th Short Strangle On The S&P

MrTopStep

With the overbought markets, low volume, and low volatility traders face now, we at MrTopStep.com have been looking at alternatives, particularly options. New, full-fledged binary options exchanges like Nadex give investors a low-cost way of protecting their portfolios and testing their sense of the market’s direction. Our friend, CME floor veteran Fairvalue Trader, has been testing them out:

Yesterday saw the E-mini S&P futures (ESM14.CME) sell off to the 1925 area, nearly 20 handles below Wednesday’s close. Typically the Friday after a Thursday round of selling presents a slow, grinding trade, especially given the low-volume chop of recent weeks. Given this, my view for Friday the 13th is a range-bound, neutral bias without anticipating any important levels being tested.

keep calm Friday The 13th Short Strangle On The S&P
keep calm Friday The 13th Short Strangle On The S&P

That’s where binary options come in. Nadex is a new exchange offering binary options on several underlying futures instruments, with weekly, daily and even hourly expirations, meaning there are many opportunities to make money in a tight-range market.

Today, I will be using binary options based on the S&P 500 futures (SPU14.CME). I believe the probabilities are that the ESM4 will trade and close in a relatively tight range somewhere between 1926 and 1944. Given my view, I will be going long the Nadex US500 (June) 1926.00 binary option at a price of $90.00 or better and will be shorting the Nadex US500(June) 1944.00 at a price of $10.00 or better.

Both contracts amount to one position that is called a “short strangle,” a market neutral strategy, so when dealing with risk and reward I will treat both contracts as a single strategy position.

My profit potential is $20 for each strangle that I open, and my risk is defined and limited to $80 per strangle ($100 payout minus the $10 credit from each side, not including exchange fees). Since I am guaranteed that at least one of the contracts will close profitable, my risk is limited to the maximum loss on a single option rather than 2 options.

The reward for this strangle is 11% (20/180) on risk; however, I believe that probabilities are strongly on my side. Remember, I am not taking a direction bias but rather a neutral position, believing that the slow, grinding chop of recent days will continue into today’s close.

All I need to reach my maximum profit potential is for the ESM4 to close between the 1926 and 1944 area.

Obviously the E-mini S&P’s 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.

Full disclosure: MrTopStep.com, LLC, has no financial interest in Nadex or other binary option businesses. The writer was compensated but the contract stipulates he is free to give his honest, critical opinion.