Simple Strategy for Trading Binary Options
We’re going to show you a strategy for trading binary options that has worked well for us in the past, and we expect this method to continue generating quick profits for us in the future. This strategy will trade binary options on individual stocks, but we are going to use data from traditional, American style options to set up our trades. The downside to this particular strategy is that we can only use it in the last hour of trading on one day each month. We’ll trade the last hour of trading before options expiration, which occurs on the third Friday of each month. We’ll utilize the concept of, “pinning the strike” (sometimes called “stock pinning” or “options pain”) to make profits as high as 80% in just one hour. As always, no option trading method is foolproof and any strategy that can gain you 80% in an hour can, and will, burn you. Make sure to your own due diligence before using this strategy.
What is Pinning the Strike?
The phenomenon of pinning is that when a stock has heavy options trading activity, the price of the stock will gravitate towards the strike price that has the most open interest at expiration. Having high levels of open interest (or existing options contracts) is one of the key factors to it. The conspiracy theorists will say that this works because the market makers are manipulating the market to take as much money from as many investors as possible. However, the reality is that pinning the strike is a result of dynamic hedging by institutional traders, including market makers, floor traders, hedge funds, and others seeking delta-neutral trades.
Why Use Binary Options?
There are two reasons why binary options are the best choice to take advantage of the phenomenon of pinning the strike. First of all, binary options are only offered on stocks that have heavy option trading activity, and therefore heavy open interest. Secondly, binary options will provide a profit of as much as 80%, even if the option is only in the money by one cent at expiration. In other words you don’t need it to move towards the maximum options pain strike by very much for this to be a profitable strategy.
How Can I Make Money With This?
A real world example of this occurred on the June 18, 2010 expiration of Google options. Google had the most open interest (i.e. maximum option pain) in the $500 strike price contracts. On that day, GOOG traded as low as $498.13 and as high as $503.47. It oscillated around the $500 mark most of the day. With one hour to go in the trading day, it was trading at $499.23. We bought GOOG binary call options with a one-hour expiration in expectation of the stock gravitating towards the $500 maximum option pain mark. Ultimately, it closed the day at $500.03, just $.03 away from a perfect pin. This trade netted us an 80% profit in just one hour, even though the stock only moved up $.80 or 0.16%.
You too can make 80% in hour with this binary options trading strategy. It’s actually quite simple. In order to take advantage of this strategy, you’ll need a maximum option pain calculator, which you can get for free by clicking the arrow:
You’ll also need a binary options trading account. There are dozens of binary options trading platforms available on the market today.
The first step in the process is to look for the most active binary options plays. We use Google (GOOG) Microsoft (MSFT) Yahoo (YHOO) Cisco (CSCO) Apple (AAPL) and Citibank (C) as our choices. On the morning of options expiration, which is always the 3rd Friday of the month, run those 6 stocks through the free option pain calculator and compare the maximum pain price to the current stock price in the market.
Once you’ve done that, decide which of the 6 you believe is most likely to gravitate towards the pain price. We like to use streaming charts to follow the trading as the afternoon approaches. Just before 3:00pm Eastern time, place call or put buys based upon whether the stock will go up or down towards the pain price (calls if you expect it to go up, and puts if you expect it to go down). That’s all there is to it. Making money with options trading just doesn’t get any easier than that.
In the beginning it’s best if you focus on one stock that you feel is most likely to gravitate towards the pain price, and trade it. However, we often trade several of the stocks, and on occasions, even all 6.
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