Market Overview

Tip On Trading Earnings Reports With Binary Options

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For the week of July 21 - July 25, 2014, earnings reports were due out on 36% of stocks listed in the Dow Jones Industrial Average.  Specifically, the following stocks had earnings reports due out during this period:

Stocks:

  • Travelers (NYSE: TRV)

  • McDonald's (NYSE: MCD)

  • Coca-Cola (NYSE: KO)

  • Verizon (NYSE: VZ)

  • Microsoft (NASDAQ: MSFT)

  • Boeing (NYSE: BA)

  • Caterpillar (NYSE: CAT)

  • Visa (NYSE: V)

  • 3M (NYSE: MMM)

  • DuPont (NYSE: DD)

  • AT&T (NYSE: T)

With so many earning reports due out, and because they were expected to be a mixed bag of positive and negative, how could a trader take advantage of these earnings reports?

While a trader could choose to trade the individual stocks or the index for these stocks, volatility can be very high, and with high volatility the trader will experience higher slippage and spreads on both entries and exits.  Additionally, if he enters in the wrong direction, his loss can be quite large.  Is there a better way to trade the earnings reports?

Below are two charts, the 720 minute and 180 minute mini Dow charts for this period.  Notice how the gray dots and the blue cross encompass the entire week of movement.  The gray dot identifies the top of the congestion area at 17069 and the blue cross identifies the bottom of the congestion area at 16923 on the 720 minute chart and at 17000 on the 180 minute chart.

In other words, with so many earnings reports due out, if results are mixed, congestion areas typically develop.  The charts above show the prices for the congestion area prior to the reports being released.  

To limit the risk on trades, a trader could sell the daily binary option whenever price reached the top of the congestion area or buy the daily binary option anytime price reached the bottom of the congestion area.  

In these examples, the trader could have placed the following binaries:

720 Minute Chart

ym72514.png

Bought daily binary on July 21

Sold daily binary on July 22, July 23 and July 24

180 Minute Chart

ym72514180.png

Bought daily binary on July 21

Sold Noon binaries on July 22 

Sold 3pm binaries on July 22

Bought 9am binaries on July 23

Bought Noon binaries on July 23

Bought 3pm binaries on July 23

Bought 6am binaries on July 24

Sold 9am binaries on July 24

Since the binaries limit the risk, even with extreme volatility created by the earnings reports, the risk is limited to the price paid on entry. In this case, buying "at the money" typically results in a risk of $50 per contract and a $50 reward.  

The following article is from one of our external contributors. It does not represent the opinion of Benzinga and has not been edited.

Posted-In: Binary Options Markets

 

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