For weeks, months and even years, many folks have been waiting for some sort of a correction in the equity markets. The second revision to the first quarter Gross Domestic Product (GDP) report showed a 1% decline in GDP yet equity indexes stubbornly continued to make all-time highs.
We have noted here in the past the oft repeated trading nugget that markets can remain irrational longer that you can remain solvent. Basically it advises against trying to pick tops and bottoms in markets.
The long bull market of the 1980s and 90s had been predicted to end in a spectacular crash all throughout the late 1990s and the analysts who predicted this were proven right but not necessarily profitable. It’s great to be right but much better to make money. The problem with trends is that often the largest part of the move comes at the end, which means it makes no sense to get short waiting to be proven right.
You must be hedged for tail events. This is great for high-net-worth individuals who can allocate $1 million to a tail hedging strategy or even someone with access to equity options but what about an individual with only long equity exposure through his or her pension or 401K?
Even this person can utilize Nadex binary options to put on a trade at a low cost that could take advantage of the inevitable downturn while maintaining the huge upside potential of a blow-off top.
Take last week for example. The S&P 500 had climbed a wall of worry in recent weeks and appeared immune to a correction. This could have been said each of the last six weeks or so but if someone got out of a long position or pared back their equity exposure they would have been sorry.
Better to have traded a weekly binary option in the E-mini S&P to close below last week’s opening of 1942.00. The cost would have been relatively minimal per contract, depending on the level you chose and the trade would have closed in your favor or moved dramatically in your favor midweek allowing you to book profits.
For example, you could haves sold the 1924.5 strike at 86 risking just $14 (not inclusive of exchange fees). While this strike settled at zero, the S&Ps several points below this level creating an opportunity to exit with a considerable profit.
You could have sold the 1936.5 strike at 67.5, risking $32.50 (not inclusive of exchange fees). This level was blown through on Tuesday and never seriously challenged. You can select a strike based on what you are trying to accomplish with the trade.
Remember you would not have had to wait until expiration to close these out; you could have taken profits during the week if you suspected the market would rebound. The point is that with binaries you can maintain opportunity while protecting yourself against a small or even large correction.