Trading Indices using Binary Options

The index markets, which include many of the major stock exchanges, are one of the best instruments an investor can use to trade the binary markets.  Indices are liquid as well as volatile, which create many trading opportunities.  Indices such as the S&P 500, the Dow Industrial, the NASDAQ, the CAC, the DAX, and the FTSE are available on different binary options trading platforms.

The best way to make money when trading binary options is to trade them when the markets are volatile.  Markets are generally volatile post an economic or central bank release or when general anxiety exists in the market.  There are also some specific types of binary options that perform very well when the market is range bound and when volatility is very low.  It is important to evaluate the current market condition to use binary options to enhance returns.

Financial markets move in many directions.  Sometimes, the markets trend in one particular direction over a short or long period.  Other times, the markets stay in tight ranges without moving in a defined direction for a long period.  There are times that the financial markets are very choppy, and move back and forth without moving anywhere.  There are also times the markets are extremely volatile and move in one direction very quickly.  Evaluating the particular market condition can be the different between a successful trade and a losing trade.  Market conditions are a function supply and demand of a financial instrument.  If demand for a product grows continuously, markets will move higher, on the other hand, if supply of a product out ways demand, the financial product will fall.

Volatile Markets

When a high state of anxiety exists, markets are generally volatile, and financial instruments will gyrate wildly both up and down.  To attain a gauge of the current market condition; an investor can look at the implied volatility of an index.  The easiest index to look at is the VIX, which is a gauge of implied volatility on the S&P 500 Index.  As the VIX increases, the market is likely to become more volatile as investors are willing to pay more for protection.  As implied volatility rises, investor will need to pay a higher premium to buy options on indices.  Therefore, if a trader wanted to hedge a portfolio of stocks with an option on an index, it would cost more as implied volatility climbs.

When implied volatility is high, the chance of a market moving quickly above or below a specific level is higher than when implied volatility is low.  One-touch options will also become more attractive, and so will hit options.  For indices that do not have a specific index that tracks the implied volatility of their options, an investor can graph the implied volatility of an ETF that tracks the index.  For example, the chart below is a chart of implied and historical volatility of the QQQQ, which tracks the NASDAQ market.

Range bound markets

When a financial instrument moves up and down in a tight range, it is known to be range bound.  When a financial market is in a bull or bear trend, it can experience times when they becomes range bound waiting for some news or impetus to push it higher or lower.  When markets reach the end of a trend, they often become range bound as some traders who where long during the bull trend exit the market, but there is not enough demand for the financial instrument to push prices higher.  This also occurs at the end of bear market trends.  Range bound markets occur when supply and demand for a financial instrument is equal.  The noise the market creates will push a market higher and lower during the course of a day, but without any impetuous to push demand higher or lower, the markets will stay in a range.  Similar to finding trends, technicians will use specific types of technical analysis to determine if a market is in a range.  The Bollinger Bands are a specific type of technical indicator that market technicians use to determine if a market is stuck in a range.  The Bollinger Band indicator analyzes price data and creates a two standard deviation range around a 20-day moving average.  As the Bollinger Bands contract and move toward each other, the range of the underlying price of the financial instrument becomes tighter.  When markets are range bound, volatility usually contracts, as anxiety about quick movements in the markets subsides.  When markets are range bound, an investor can use a miss option to take advantage of the range qualities of the market movements.  A trader can place miss options above or below the Bollinger Band levels with the assumption that the markets will not break out of the current range.

There are numerous types of market conditions, and they are depicted by volume and volatility as well as market sentiment.  To trade binary options successfully, it is important to understand the current market conditions, to determine how a trade will perform given the current environment.