Yesterday, crude oil futures started with a rally, making new 52-week highs and trading up to $55.24 on rumors of more OPEC production cuts. However, following a report later in the session that Libya was considering increasing production, crude oil took a tumble, trading down to $52.22, a $3.02 drop.

Over the last month, crude has been trading in an uptrend from the $44.82 low. The chart below shows crude oil on a four hour basis since November 21st. The Ichimoku Cloud indicator on the chart has defined a supportive area for this instrument over the last few touches.

Traders looking for a market viewpoint regarding crude oil may take several factors into account.  Noting the uptrend over the past month and that yesterday’s sell-off was extreme and based on rumor, as well as the fact that this future is trading at what has been established as support by this indicator, one possible trading viewpoint is that it may be a good time to trade a bounce in this market.  

However, timing crude oil trade positions can be a challenge. Trading the future outright requires $3,500 margin, and each one cent tick is worth $10.00, which makes it difficult for many traders to trade a position and be able to stick with it without risking too much.

This is where binary options come in. Binary trading is fast-growing industry in the United States and around the world, and offers a yes/no proposition to trade positions with a fixed payout and fixed amount of risk. Therefore, unlike a trader of outright futures, a binary trader doesn’t have to worry about negotiating stops, and can simply focus on price and time.

Please note that the ideas presented here are not intended as trade recommendations, but rather as illustrations of how a trader may view support in a commodities market, and then apply a binary options strategy.  We will look at an example of a mildly bullish binary trade and of a more aggressively bullish trade, using current binary options from the table below.  Each of these binary option contracts is based on a $100 base value per contract.

Currently, the February crude futures contract is trading at $52.35. A trader with a mildly bullish viewpoint could buy the weekly binary option strike of $52.75, expiring at Friday’s 2:30 p.m. EST close, for  $45.50 per contract. The $45.50 purchase price would be the amount risked.  Since these options have a $100 base value, the potential reward if the binary settlement value is above the strike at expiration, would be the difference between the purchase price and the $100 settlement, or a profit of $54.50 in this case, giving this trade a better than 100% potential return on risk.

A more aggressive bullish trader might consider buying the $53.75 weekly option, a strike $1.00 higher than that in the previous example. This option would be profitable if the underlying retraces just part of yesterday’s move by the end of the week. This option strike can be purchased for $21.25 per contract.  This means that for a $21.25 risk, the trade could potentially return a $78.75 profit, or a nearly 4:1 return.

Binary options are offered on many markets with a variety of expiration timeframes, giving any trader the opportunity to craft a strategy based on their own unique market views.

 

Note: Exchange fees not included in calculations.

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Trading on Nadex involves risk, which may result in financial loss, and may not be appropriate for everyone.  Any trading decisions that you may make are solely your responsibility.  The information presented in this webinar is for informational and educational purposes only.  The contents of this webinar are not an offer, or a solicitation of an offer, to buy or sell any particular financial instrument offered on Nadex.  Past performance is not indicative of future results.