On Friday, December 11th, Wall Street posted its biggest weekly loss since August. The Dow Jones Industrial Average dropped by 1.77 percent and the S&P 500 dropped by even more: 1.95 percent. There are a lot of reasons for this, but it boiled down to two main points in the end. Investors are afraid of rate hikes, and they are losing confidence because of the free fall in the price of oil.
With the Federal Reserve strongly expected to raise interest rates sometime next week, it’s probable that the major indices like those mentioned above will fall even further in price. Watching weeklong and month long binary options are always a good idea, and with this particular circumstance, there is already a lot of momentum favoring going with the put variety when considering these. The Fed’s decision is slated for December 16th, and selloffs are strongly expected before and after this. It seems to make an educated decision on what will happen with indices–and how to trade them cheaply–a very easy thing to do.
Of course, this is just a superficial glance at things. For example, let’s say you are in agreement with analysts, and that you believe a rate hike is about an 80 percent certainty. If this was all there was to it, and that a rate hike guaranteed a drop in the price of the Dow, then you wouldn’t need a huge rate of return to justify buying a put option that reflected this. To have an advantage, you would only need to receive a 25 percent return to breakeven over the long run. Since weeklong binary options are currently ranging at about 72 percent, this seems like a good choice.
It’s not quite that simple, though, unfortunately. Even with the stated certainty that the Fed will do this, there’s no guarantee. Even an 80 percent confidence rate is just a guess. There was a 75 percent confidence rate last month when the Fed met that the rate would be raised, and it wasn’t touched.
Another factor to consider is, of course, the fact that the market is already dropping in anticipation of the rate hike. Much of the damage has already been done, and if history is any indicator, there’s a good chance that any ill effect that a rate hike might have will be short lived. So, while there might be an 80 percent chance of a rate hike, the actual chances that this will sway markets still at the end of the week, forcing them to go down, is probably more like 55 to 60 percent. In this case, if you are to take out a binary option to reflect this, you would need to ensure that your broker is paying out at least 73 percent if there is a confidence rating of 58 percent or better that there will be a weeklong drop in the index of your choice. The rate of return on a binary option is listed before you execute the trade. The confidence rating, or success rate, will need to be determined by your own methods. This example makes shows that you should be looking for far better than 72 percent if you want to be successful on an index being influenced by the Fed.
This little exercise in math might not seem worthwhile, but it is exactly the mindset that you need to have to be successful when it comes to binary trading. This is a big event, and a lot of people will be trading it, so being able to successfully figure out what kind of edge you actually have and whether or not the projected return that you are expecting will be worth that edge is the only reliable way to figure out whether or not you should be involved in that trade.