Yesterday as the equity markets were closing in the United States, news broke of an earthquake off the coast of Japan that was then followed by a tsunami warning. First of all, it is good news that at the time of the writing of this article there has been no reports of deaths, injuries or major damages.
However, as the initial news was hitting the wires, the Nikkei futures, which is based on Japan’s benchmark index, began to sell off over the concerns of the unknown. Thankfully, more comforting news began to hit the wires. Following the earlier sell-off, the Nikkei futures began to bid higher into the Tokyo open and then resumed its uptrend during Tuesday’s session, and in fact proceeded to trade to levels not seen since the first week of this year.
When looking at the binary option activity last night, time and sales show that there was increased volume in options based on the Nikkei, also referred to as the Japan 225, on the largest regulated exchange in the United States. It appears that many traders were trading some less expensive out-of-the-money options on the Nikkei; presumably, many of these were being bought with the expectation of that index rallying.
It turns out that trading on the expectation of a rally in the Nikkei was a good idea as many of these binary options saw an increase in value and a resulted in a profitable expiration. These options made a lot of sense for traders in a very practical way. First, they were limited in risk, with the risk being limited to the purchase price. Second, because of this limited risk, binary options removed the necessity for stop orders, giving traders more time flexibility to be correct in their overall view without being stopped out in the immediate term. Lastly, binary options offered traders a greater payout based on a more pinpointed view.
These options appeal to a diverse array of traders. Rather than needing to have a futures account with access to the Singapore exchange, or having to trade the CME’s Nikkei future, which is $25.00 per tick or minimum increment, or waiting to buy an equity ETF when the stock market opens in the United States the next day after the move is over, binary trading offer traders an opportunity to easily define risk, reward and time-frame, providing them the chance to craft their own individual strategies.
CFTC-regulated binary options are offered on exchanges in the United States based on several asset types such as forex, commodities and equity indices with multiple strikes and expirations.
Note: Exchange fees not included in calculations.
Futures, options and swaps trading involve risk and may not be appropriate for all investors. Past performance is not necessarily indicative of future results.