For the directional trader with a small trading account binary options might be an attractive opportunity. The Chicago-based Nadex (North American Derivatives Exchange), for instance, will open an account with no minimum funding, and to trade a single contract one needs no more than $100. Of course, depending on the structure of the trade, that money might disappear in the blink of an eye since for those trades held to expiration (which might be intraday, daily, weekly, or event-based) winning contracts are worth $100, losers worth nothing.
Before retirees rush to deposit their Social Security checks with a binary option broker and stay at home buying cheap out-of-the-money calls instead of going to Atlantic City and shooting their wad on a one-armed bandit they—and, naturally, all other traders—should learn a great deal more about binary options. Abe Cofnas provides a good introduction to this instrument and also offers insights on directional trading in Trading Binary Options: Strategies and Tactics (Bloomberg/Wiley, 2012).
Those traders who have shied away from options because they seem complicated may be relieved to learn that understanding the Greeks is not essential in the world of binary options. Yes, market makers use them to price the binaries and Cofnas even introduces the reader to volatility smiles, but the trader’s major decisions are whether to buy or sell binary options and at what strike price. How much does he think the market will move in a given length of time and in what direction? At expiration he will either be right or wrong and will either collect his $100 or lose whatever he paid to put on the trade.
We all are familiar with the “no free lunch” principle. In this case, the speculative trader who opts for the simplicity of binary options has to be very good at predicting and timing market direction. (Hedgers can of course also use binary options, but this book is written primarily for the retail speculator.) Cofnas devotes four chapters to tools the binary options trader can use to improve his skills: sentiment analysis, macroeconomics and the currency markets, technical analysis, and volatility tools.
He then fleshes out the five basic binary option trading strategies—in-the-money, deep-in-the-money, at-the-money, out-of-the-money, and deep-out-of-the-money—using examples from the Agora newsletter he writes. The trades were in gold, the DAX, crude oil, currency pairs, and the S&P 500. Some were sentiment based, others event driven. He devotes an additional chapter to strategies for analyzing event risks.
The book concludes with chapters on risk management, evaluating and improving trading performance, algorithmic approaches to binary option trading, and a 50-question quiz.
Cofnas’s book should be useful to anyone considering adding binary options to his trading portfolio. A beginner can understand it, an intermediate trader can profit from it.