Last week saw Crude Oil (CLZ14:NYM) make a fresh multi-month low as it traded below $76, finding a low at $75.84; this, in turn, resulted in a rally in the crude market which failed just below the $80 level this week, finding a high of $79.85.
At the moment, crude futures are trading at $76.25; and with recent volatility in this market, it is quite possible that either that either last weeks low of $75.84 or today’s overnight high of $77.16 could be tested and exceeded today.
Today, I will be presenting two possible ways to trade this market – one from a bullish view, and the other from a bearish view – using the flexibility that Nadex binary options provide.
If I am bullish and believe that CLZ4.NYMEX will close today above or near the overnight high, I would consider purchasing the Nadex Crude Oil $77.00 daily option that will expire today at the 2:30 EST close. I would want to purchase this option at a price of $25.00 or lower; this would give me a $75.00 profit or 3:1 reward on risk if CLZ4 closes above $77.00 today.
If I have a more bearish view of this market and believe that that crude may close below last weeks low, then I would consider selling short the Nadex Crude Oil (Dec) $75.50 daily option that will also expire at today’s 2:30 close. I would want to sell this option at a price of $75.00 or better, which would also allow me a 3:1 reward vs. risk and would reach maximum profit if CLZ4 closes below $75.50 today.
Nadex options have a $100 payout, and profit is determined by the difference in the cost of the option and the $100 payout, while the risk is limited to the amount paid. When shorting a Nadex option, the profit potential is the premium the option was shorted for, while the risk is the difference in that premium and the $100 payout.
I only chose to look at a two possible options on one instrument, but Nadex offers hourly, daily and weekly expirations based on several indexes including US and international indexes, energy, metals, agriculture, and forex products.
The diversity of products and expirations allow me many possibilities when choosing a strategy and risk/reward profile that suits my view.
Obviously, the energy markets have been very volatile lately, but using the binary options offered by Nadex limits my risk to the premium paid at the time the trade is first initiated, so my stop-loss is already built in.
Remember, if your trade starts working in your favor or against, you have the option to liquidate early; but at expiration, only one party (buyer/seller) can receive the $100, and the other, nothing.