Ideal binary options strategy for high volatility

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Ideal binary options strategy for high volatility

BOBO strategy (OBIF) has been invented by the Italian trader OB60 and it stands for Binary Options Boundary Out.

As the name implies, through this strategy we invest in the boundary options. In this type of binary options the trader can choose whether to trade within a range of prices (IN) or outside a price range. The broker sets a price range and the trader must predict whether in a given timeframe the price of the chosen asset will end in or out of this range.

Generally the price range is not the same for the inside and to the outside. For the inside it is a bit ‘tighter and the outside is a bit wider. When the trader opens the boundary option the purchase price is exactly at the center of the range indicated by the broker whether it is an option IN or OUT.

Trading with BOBO, at the option deadline, the trader expects the price to be outside the price range of when he bough it. Obviously, before the trader purchases the option, he will see on the chart of the broker the current price and two parallel lines defining the interval, and these lines will move based on how the current price changes. In the moment in which the trader purchases the binary option, the range will be set according to the purchase price. This way, the trader has to hope that at the trade deadline the price will close or above the maximum level of the range or below the minimum level in order to close in profit. If the price of the asset closes within this range, the option will result in loss.

The best broker that we currently recommended for this type of investment is undoubtedly 24option. We used it over and over again and the results were surprising.

Attentive readers will have surely already realized that with this type of investment we have shifted the focus from management to the volatility. That’s right, we do not care about the direction that the price will take after we buy the option, it can be up or down, but we don’t care about it, what we really care about is that the price will move from the current value, in one direction or another, and the important thing is for it to move for a certain number of pips.

How the strategy was born

OB60 has noticed, and how he also many other traders who follow the markets, which in proximity of the publication of certain economic news prices undergo strong jolts a few moments before publication or in many cases even several minutes. This high market volatility is not generally predictable in direction, but we don’t care about that, we only care that there is volatility. Clear? We do not care about the direction, we are only concerned that the price suffers a jolt.

How to apply this strategy

In order to apply BOBO strategy we need, first of all, to know the timetable of the news release, and for that you can look directly at the economic calendar.

Then we must be ready to open a boundary option OUT being careful to choose as its deadline the one of the release of the news that we have selected. Since this date is made available by the broker about 30 minutes before, it means that if we want to open a BOBO on the 9:30 news, we have to check that this deadline is available on the broker approximately at 9:00. Generally, we find available up to 8:59 the maximum deadline of 9:15 that is not good for us. Only at 9:00 the broker allows investments with a deadline of 9:30.

Therefore if the news will be published at 2:00pm it means that we have to be ready to open the investment at 1:30pm.

In these 30 minutes the price can move often within the selected range especially in the minutes and seconds before the release of the news. The price can also swing immediately reaching price ranges far from the one we bought and for us this is the best case because we can decide to close the option, even before the natural deadline, achieving an immediate profit lower than the preselected one that usually is the 70% of the invested amount. It can also happen that the price stays within the range we selected and in this case we close the option in loss. But, if you notice, it happens very often that the price is very unstable before the publication of an important economic news and this will play to our advantage.

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BROKER Min. Deposit Min. Trading Payout Review
$10 $1 92% REVIEW

What economic news to select?

It is best to select the high volatility news (3 bulls), which are those that generally create higher volatility such as the Non Farm Payrolls. This news is related to the USD currency and is usually released on the first Friday of each month. But, like this one, there are many others, for instance those related to home sales, interest rates or the chairman of the Federal Reserve speeches.

Attached you can find some samples of investments based on BOBO strategy created by OB60.

In my opinion it has been the best binary option strategy of the 2020.

Before actually investing we invite you to open your own demo account with 24option so you can test it in demo account mode and then possibly decide to invest in real money mode.

Like any other trading strategy, it doesn’t guarantee 100% success, but because the results have been many and absolutely encouraging, we can tell you that with a good money management, considering the occurrences with which we closed the Trade In The Money, you can get positive results over time.

High Volatility Option Trading Strategies

This page summarises some of the trading strategies that I use in the high implied volatility environment.

The low implied volatility environment is defined as stocks or indexes with Implied Volatility (IV) Percentile or IV Rank lower than 25. I only use high volatility strategies when IV percentile is higher than 25. When it gets lower than 25, I would consider implement low volatility trading strategies as well depending on the market situation. So there is a 5 points overlap between the strategies.

NOTE on IV percentile and Rank: IV percentile and IV rank are calculated differently and IV percentile is more sensitive to the actual IV change over the defined period of time used for the calculation. I personally use Thinkorswim platform so what it gives me is what I use.

Summary of High Volatility Trade Setup

Iron Condor, Strangle

  • IV percentile higher than 25% for Indexes and 50% for stocks.
  • If I need to make a trade between IV percentile 25-50%, I will try to go out more in time (example: choose 60 days expiration instead of 45 days) as it has been shown longer time can compensate the low IV somewhat, but not by much.
  • Exit at 35% – 50% max profit. If too close to the expiration 35%, if not than 50%.

IronFly, Straddle

  • IV percentile must be higher than 80%.
  • Never place this trade on a short time duration, unless there is a binary event (earning) so that I know the IV percentile will drop immediately after the event.
  • Exit at 25% max profit. This should be achieved after about 25 days with 45 days expiration options. If it takes longer than that, consider getting out.

IRON CONDOR

Iron Condor is essentially a combination of far out of the money Call Credit Spread and Put Credit Spread.

Typically, they are one standard deviation out of the money (68%). In other words about 0.15 Delta for each side so combined probability of losing would be about 30%. The idea is to set up the Credit spreads far out enough on each side so they would expire worthless with a high probability of success.

This might sound like a “dream comes true” setup, but in reality it has several drawbacks as discussed below.

Also, instead of letting it expire, taking the money off the table after hitting certain target (for example, 35% of the maximum profit) would be an ideal move in many cases.

1) It needs to have enough open option interests

Not every underlying securities have large open option interests out the money so this would limit the number of candidates. Indexes such as SPY, SPX, QQQ are good candidates. 2

2) Implied volatility of the underlying security ideally should be high (higher the better)

Since we are selling options to get credit, we want to take advantage of high implied volatility because it would make options more expensive. As the volatility drops, it would help is getting closer to the target price.

CHICKEN IRON CONDOR

One of the most confusing aspect in options trading I found is the name used for strategies. In some cases, different names are used for essentially the same strategy. Chicken Iron Condor is one of those strategies.

Essentially, by moving the Call and Put options sold closer to the underlying security’s current price, it creates a narrower and taller return curve.

IRON BUTTERFLY (A.K.A. IRONFLY OR SYNTHETIC STRADDLE)

This strategy is a good alternative to selling Straddle if your trading account (also an IRA account) is not permitted to sell unlimited risk options. Some people refer this to a Synthetic Straddle because of the risk / return earning curve it creates is exactly the same as Straddle yet with limited risk.

I personally use this in IRA accounts and for Straddle trades that would require way too much margin.

Is Iron Butterfly as good as Straddle?

Studies done by Tastytrade shows that Straddle is a better choice than Iron Butterfly in the high IV environment.

On the other hand, in the lower IV environment, Iron Butterfly is a better choice. However, it is important to note that both Iron Butterfly and selling straddle shouldn’t be the strategies to choose in a low IV environment to start with. In low IV environment, use these strategies instead.

So the message here is that, if selling Straddle is an option, choose that instead of Iron Butterfly.

SELL NAKED STRADDLE

This strategy is only limited to accounts that can execute unlimited risk options trading such as selling naked Call. You would need to apply for an approval from your brokerage firm.

Instead of buying an out of the money Call and Put options to create a limited risk trade, this strategy would only sell Call and PUT to create a pyramid like risk to return graph. As you can see from the image below, it could look pretty scary because of the unlimited downside risk.

However, by eliminating the need to buy out of the money Call and Put, it not only making the trade gets executed more easily and save some transaction cost, it also widens the break even points a little wider and reaching to the target exit point little easier.

I personally only use this when there is a very high IV Percentile. Ideally above 80%.

When to sell Straddles?

Based on the studies done by folks at Tasteytrade.com, this strategy should be carried out ONLY when Implied Volatility is at least higher than 50%. In fact, if you watch this video, it explains that out of the money strangle should be used instead of in the money strangle when there is a low volatility.

NOTE: Study period Jan 2009 – Aug 2020

How to manage Straddles

A screenshot from this Tastydtrade video shows the expected Straddle trade return based on the days held.

This table could give you a baseline to compare with in case you wonder if you should get out of a trade after certain days.

For example, after 10 days of entering a Straddle trade, you are seeing 20% profit. This is a much better return than what’s shown in the table so if you want to get out of the trade, you should.

SELL NAKED STRANGLE

This is essentially the unlimited risk version of Iron Condor.

WHY THESE STRATEGIES SHOULD NOT BE IMPLEMENTED IN LOW IV ENVIRONMENT

A study done by Tastytrade shows that simply the strategies mentioned on this page are better in the high IV environment.

STRADDLE VS STRANGLE

This Tastytrade study shows the difference between Straddle and Strangle in terms of expected return based on days held.

HOW TO MANAGE THE WINNERS (WHEN TO GET OUT OF A TRADE?)

VIX OPTIONS TRADING

VIX is constructed using the implied volatilities of a wide range of S&P 500 index options. It is also known as the “fear gauge” of the market because it shows the market’s expectation of 30-day volatility.

The tricky part of trading VIX option is because its underlying security is based on VIX Futures and it’s an European style option. What I also found is that VIX option that are a month or a few months out do not increase or decrease as much. It is more effective to trade UVXY and VXX if there are substantial open interests.

Some people argue that buying VIX PUT option is more effective, however, I would argue to sell CALL spread option instead.

Make sure to give it enough time (45-60 days) to revert back to the mean. I made a huge mistake purchasing UVXY CALL spread with only about 20 days to expiration. It turned against me and touched the exit point THE WEEK after the expiration!! In other words, the options expired on Friday and the price literally hit the exit target on the following Monday!! NEVER, EVER trade VIX, UVXY, or VXX too close to expiration.

The following videos that I found on Youtube explains pretty well about how VIX options work.

Volatility In A Hand Basket

Volatility Indicators For Binary Options

Volatility is a great method of analysis for binary traders to get acquainted with. While most average traders will shy away from volatility if you learn to understand it and how to apply it to your trading it can lead to explosive profits. In previous postings I have gone over some reasons why volatility is your friend and how to apply volatility to your trading so today I will go over some commonly used indicators. By no means is this a be-all end-all guide to volatility indicators but it is a useful guide into the different methods of measuring volatility and how that information can be displayed on your charts. To quickly touch base, volatility is the measure of movement in an asset and can be current, relative, historical, implied and used to create bands, rays, oscillators and moving averages.

Historical Volatility – Historical volatility is a measure of how volatile an asset has been in the past. It is a measure of the standard deviation of prices over a set period and is used to predict how volatile an asset will be in the future. It is natural to assume that a higher volatility asset will have a higher standard deviation and therefore a higher historical volatility, which is true. This is a useful tool because it can help traders determine the amount of movement that is likely to occur. The caveat is that the movement implied by the indicator could be in either direction, not just the direction you want, so it is vital that you do not use this indicator by itself.

Implied Volatility – Implied volatility is a projection of how volatile an asset can be expected to be. This may sound a bit like historical volatility but there are differences. It is based on the prices of standard options relative to the price of the underlying asset. I know, as binary traders this doesn’t matter to us but it does, let me assure you. Implied volatility can be used to measure extremes of market sentiment; when implied volatility is extremely high, or extremely low, it can indicate times when the market is about to change direction. The higher the implied volatility, the larger the expected movement can be and vice/versa. Implied and historical volatility can both be displayed as an oscillator or directly on the charts.

Relative Volatility – Relative volatility is an oscillator style indicator that measure market movements relative to past price history. It was invented by Donald Dorsey and gives an indication of the direction of volatility. This is important because volatility on its own is merely a measure of movement, not direction. The indicator moves between 0 and 100 on a calculation based on 10 days/bars of data and then smoothed by a 14 period moving average. These parameters can be adjusted to suit your needs but I always like to use standard settings on my indicators. This indicator is a marvelous measure of market strength and should be used as confirmation of other signals such as moving averages or MACD. When the indicator rises above 50 it indicates positive strength, when it falls below 50 it indicates negative strength.

Chaikin Volatility – Chaikin Volatility is another oscillator style volatility indicator. It is a source for debate as it measure volatility as the movement between the open and the close and does not include gaps as other indicators do. Another difference in this indicator is in how it is derived. This one is not based on standard deviation but on percentage movements relative to a moving average of high and low prices over N days. The standard set up is for a 10 day period, smoothed by a 10 day moving average. It is often used to indicate tops and bottoms of trends as sharp increases in the indicator often precede market reversals. The indicator is best used as a confirmation of other indicators as with most tools in this group. It works well with Fibonacci Retracements as well as other trend and support/resistance tools.

Bollinger Bands ™ – Bollinger Bands ™ are fantastic method of utilizing volatility for binary options. This indicator uses a standard deviation of prices to create a moving average and a pair of signal lines that create a sort of volatility envelope around prices. As volatility increases in the asset the bands will widen, as it decreases they will narrow. Price action will move from one extreme to the other and provide signals along the ways. The indicator can be used to indicate continuation, reversal and for signals like crossovers and continuations. It is by far the preeminent volatility indicator of this group and a top recommended tool for binary traders. It can be used by itself or in conjunction with other indicators and can be applied to charts ranging from 1 minute to 1 day to 1 week to 1 month.

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