Using The DAX Binaries To Achieve A Higher Return On Investment With Less Risk

There are always trading choices but what is the best choice to the traders given the different market scenarios. Does trading the DAX futures or  trading binary’s based on the DAX future  offer a better choice for day trading capital?

Below is a 15 minute chart of the DAX futures.  Given the trader's bullish perspective, he enters a long position with one contract at the 9934.5 and exits at the end of the day at 10001.5.  The minimum tick on a DAX futures contract is .5 where one DAX index point is equivalent to 25 Euros or $34 at the current EURUSD rate.  The 67 points gain on exit thus equals $2,278.  

The formula for calculating the return on investment is (Gains - Cost) / Cost.  Using this formula, the Return on Investment (ROI), using the intraday margin for the DAX which is $2500, can be calculated as follows:

(4778-2500)/2500 = 91.12%

While the ROI appears quite lucrative, is it the best option considering the volatility of the DAX and that he is exposing his account to a loss greater than the required margin ($2500)?

Using the same chart, let's examine using the Binary Options with two different strike prices, depending on the trader's risk tolerance.  Remember, Binary Options are based on True / False statements.  In this case, the trader has a bullish bias.  His strike price choices expiring at 4 PM New York time are:

• Choosing the first strike price at 9960, limits the trader's risk to $34.  If at expiration price is greater than 9960, he collects $66 in profit.

• Choosing the second strike price at 9940, the trader limits his risk to $51.  If at expiration price is greater than 9940, he collects $49.

What is the ROI on the binary choices?  Using the same formula as above, his Return on Investment is:

Strike Price Greater than 9960

(100-34)/34 = 194%

Strike Price Greater than 9940

(100-51)/51 = 96%

In both cases, using the DAX binary options, produced a higher ROI than using the futures.  However, the first case, using the DAX futures, had a profit of $2,278, where as shown below, if a margin equivalent of capital is used the binaries would yield a profit of $4,818 or $2,401.  What the trader may fail to see is the power of trading multiple binary options instead of using futures margin leverage that can expose the trader to a greater loss than the intraday margin required.

Examining the different scenarios again, using a $2500 margin-equivalent basis on each, the ROI remains the same, but the outcome looks very different in terms of risk and profit:

Futures

Using a $2500 intraday margin, trading one contract, profit is $2,278.

Risk is unlimited.

Strike Price Greater than 9960

Purchase 73 contracts at $34 per contract, the resulting profit would be $66 per contract or $4,818

Risk is capped at $2,482

Strike Price Greater than 9940

Purchase 49 contracts at $51 per contract, the resulting profit would be $49 per contract or $2,401

Risk is capped at $2,499

Instead of using the leverage power of the futures to increase the ROI and potentially suffering an even greater loss, the trader invested the margin-equivalent of one future contract in the binaries for a significantly greater ROI, while capping his risk at less than $2500.