Ratio Binary: A Strategy For Insuring Or Layering Your Trades (Part of a Series on Binary Strategies)

A Ratio Binary is when uneven amounts of contracts are bought and sold on the same instrument. If you will recall, when we discussed the binary butterfly, equal contracts were bought and sold. If it was a normal binary butterfly, one upper contract was sold and one lower contract was bought. If it was a strangled butterfly, it was more complex, but the contracts were still equal.

In a Ratio Binary, you might buy one lower contract and sell two higher contracts. Conversely, you could sell one upper contract and buy two lower contracts. A 1 to 2 ratio between the legs is the most common of this type of strategy, but it is also possible to structure it with a 1 to 3 ratio, a 2 to 3 ratio or other ratios.

It is a directional trade. You could perform this strategy if you feel that the market is going to move one way or the other. You are saying that movement in one direction is preferable to movement in the other direction. You want to have some amount of hedge or protection on your trade. The main consideration is that some movement will occur. If there is not any movement, this strategy is likely to be a losing strategy.

Let’s look at an example of buying one lower contract and selling two higher contracts. This would be a 1-to-2 ratio. You may have received the signal that EUR/JPY is going down so you sold two contracts, but in order to put a slight hedge against your trade, you buy one lower contract. This would give you some coverage should the market start to move against you. You would be able to exit out of one or both of your upper contracts and hopefully gain some profit from the lower contract. If you were to only exit out of one of the upper contracts, this would become a regular binary butterfly strategy and you would hope to profit by having the price stay between your two strikes.

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Suppose you were able to sell both of your contracts near the high of the expected range for $135.93 and you were able to buy one contract near the low of the expected range for $135.72. You were able to enter these contracts at the beginning of the hour and sold each of your contracts for around $35. You bought your contract for $75. As time goes on and the market falls, you probably will exit your bought contract when if its price reaches your stop limit set at about $57. If so, that would be a loss of $18. You would take profit on your sold contracts when they reached approximately $4 for a combined profit of $62 on those two contracts. If there was a loss, you would deduct if from that profit giving you a net gain of $44 not counting any fees. If the market continues to channel near the middle of the chart, you may be able to collect profit on all three of your contracts. Assuming you held your bought contract through expiration, your profit would be $25. Add that to the profit on your other two sold contracts of $62, and you just made $87 profit!

The ratio binary trade can also be used to layer in trades during News Events, where you can enter a trade, take profit and then use your profits to gain other profits. This was mentioned in trading a Google Earnings announcement during high implied volatility where you can implement this strategy to build your strangles. To do that, you would use the ratios in high and low probability contracts.

Using this strategy, there are many scenarios you could call into play. Be sure to analyze the situation you are trading and devise a plan that will best meet your trading needs. For help in learning other strategies and systems, go to www.apexinvesting.com, a service provided by Darrell Martin. Apex Investing Institute offers free education, and free access to the Nadex Binary and Spread Scanner Analyzers. Member traders are invited to trade in the chat rooms, take advantage of trade signal services, have key indicators and access the Apex Forum. The forum content is updated daily and includes over 8000 members. In a supportive learning community of seasoned as well as up and coming traders, traders of all levels learn how to trade Nadex binaries and spreads in depth, as well as futures, forex, stock and options, and gain an edge for successful trading overall.