While many news outlets said the vote was “too close to call” hours before polls closed the expectations of most traders and investors were for the U.K. to remain in the European Union. They narrowly voted to leave and CME E-Mini S&P 500 futures traded lower by over 100 points overnight. Shortly after the open the market staged a huge rally surging nearly 50 points off of the overnight lows. While this type of price action is not typical these huge moves and reversals highlight one of the most beneficial features of binary options. Staying power.
Binary options have a limited level of risk and reward. This is due to the binary settlement nature of these contracts. No matter what happens to the underlying market a binary options contract cannot settle for more than $100 or less than zero. This means that binary options have a built in stop loss. If a trader got long weekly binary options yesterday and the market fell through their strike it doesn’t matter how much the market fell. The trader was able to stay in their trade. Let’s look at an example.
Yesterday a trader buys the weekly US 500 > 2082.50 Binary Option for $80
Overnight the market traded as low as 1999. A trader who was long outright futures would have experienced huge losses at this level and likely would have been stopped out of their trade and possibly would have a margin call to deal with. The binary options trader does not have this concern. Even if the market fell more overnight they would have been able to stay in their trade, knowing that their losses were limited to the downside. This also gives the trader the ability to participate in any rally back the market might see. While these options are still well out of the money the trader is still participating in the trade and should the market come back even more the trader may be able to get out of their position.
This is a feature that makes binary options a much better tool for risk management than futures or ETF’s. The price action we are seeing today is definitely uncommon but illustrates perfectly how beneficial binary options can be in a market environment like we are seeing today. The general consensus amongst traders is that price action will likely be fast today and we may see some more reversals before the day is out. If you are trading around the Brexit, good luck. You might want to consider using binary options to protect yourself and manage risk during a time of heightened volatility like this.
Futures, options and swaps trading involve risk and may not be appropriate for all investors. Past performance is not necessarily indicative of future results.
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