Box or Binary?

I compared a 4pm near-at-the-money 3325 long bine against Oanda’s box option product at 1127 EST when EUR was at 3327. The premium to sell (to hit a price below 3325 on OA’s box) was $45 for a (4pm-4:05pm) compared to the $50 at the same price and time for the HS binary on Hedgestreet.com, representing a 10% difference. You would pick up more premium going with HS for the selling of the bine than buying the box. And these are already factoring in the wide spreads on HS. (Update 2/11/2009: Reading my own post here 2 years later, I assume I was referencing some kind of arbitrage opportunity here)

Filed under: Uncategorized, arbitrage, hedgestreet

ATM Strike Leverage

The implied cash market leverage for an At-The-Money bine (at $50) is 1329% compared to the highest fx cash market leverage of 200%. If you were long an ATM bine at $50, the equivalant 200% cash positon would be $333. In other words, if you feel an ATM 1.3325 2pm bine was going to hold, you would receive an approx 50% discount on Hedgestreet.com for your trade. This is a leverage-calculated price.

Even if you felt the price wasn’t realstic, your stop-cover would have offered some protection. As you see to the left, the post-New Housing figure announcemen’t affect on the Euro on the 12-2pm NY EST session (per-tic time frame). The maximum leverage on Oanda.com is 50% which gives a equiv. cash position of $1330 on 50,000 units. Each 1 pip = $5, 10 pips = $50. Say you sold a 3225 2pm. You see the price went to 3339 approx. Your loss is binary-static; your follow-up action would be to spread long 5 pips.

Theoretically, a potential 5-pip loss over 2 hours would yield a “10-pip” gain on the 3325 2pm bine. As you see in the graph, your cover-loss spread would have been egagined at 1.3330. The breakeven would have been 1.3338. Is this noise? Take your 5 pip profit in cash and wait till prices go back to <$50 on the 3325 bine. Your profit would be your Cash Pips – the noise factor. Or would you want to implement the tight stop? as each tic up represents your net profit.. But, alas, as the case may be, you’ve paid for the privledge to play this small range up , waiting for it to come down to the bine, then up again in cash.

Filed under: Forex, hedgestreet

VIX in Feburary Housing’s impact on EUR/USD – Loss/Cover Play

This was a 3278/3250 -12 noon. (Long EUR/USD at 3278 short 3250 @ 93) I took on at 9am. In play today was today’s Feb. Housing figures and Event Risk – the capture of British sailors by Iran and rising oil, all adding fuel to the fire, no pun intended. Naturally all this would lead to a >7 pip VIX risk, even for my most modest clients. Even a non-event risk like the Federal Reserve last week announcing they there would be no change in rates caused a >7 pip VIX shot.

Loss/Cover Play:  My initial stop loss on this trade was -25 pips (3253), and my bine close I set at 63 (+30 pips). This is one of those classic stop-loss covers. If EUR/USD stopped out, it would of breached the bine close for the cover-stop-loss. However, the VIX event horizon more than likely would have covered a $7 loss on the 12 noon 3250. Eventually my cash got closed out at 3340 on this trade by a tiny trailing stop I kept moving up, for a net pip gain of +50 in 1 hour.

A simple buy-into-VIX straddle on both of these at 9:30am could have also been employed, but the same leverage was closely met by the cash + 1-sided bine strategy employed. I attached today’s graph just to show the bine’s (green lines) and the price going through these levels. As you can observe, the straddle would have been successful given the propensity for the price to climb through the 3300.

The one advantage the VIX straddle has over cash is the delta. VIX was priced, but the VIX surge was not. Thus the change in OTM bines per pip from, say 3280 – 3310 would have been around 50% greater than most cash – leveraged accounts of the same amount. For example, from 10-15 to 60 $ per contract as it went ITM, even with 2 hours until expiry.

Today’s VIX was pretty much skewed. Apparently the Street was caught off-guard with the February’s Single Home Sales. Even CNBC noted the impact February’s weather may have played on this figure.

Filed under: stop-loss, hedgestreet

EXAMPLE OF EUR/USD +3280/3300 -10am est

The above is an example of the time line of the stop-loss cover conducted yesterday (3/20)

6:09: Long Cash at 3280
8:44: entered an order to sell 1 HS 3300 at $55 when the underlying was at 1.3295.
8:48: my cash position was hit with the stop-loss of $50.
9:02: the 1 HS Short position was hit at 55 when the underlying was at 3305
10:00: HS contract closed ITM for a $55 gain.

So, rather than a -50 loss, the intended effect on the HS covered the loss with an incidental $5 gain. One thing to notice is that the placement of the stop is as important as the important as the price of the HS. Once could of used a more generous stop-loss thereby allowing the cash position to survive. Or, one could of employed buying the 3330 OTM when the cash position was put on . It depend when you want to risk the premium, early the trade or later on, as in this example

Filed under: stop-loss

Hedgestreets’ Binaries featured Forex TV

This video is an old promotional piece introducing binary options. At the time it was made, HS currency binaries were traded three times a day, and the exchange was open until 8pm EST. Currenly its hours are until 4pm EST. I think the interviewer is pretty funny!

Filed under: fun, hedgestreet

EUR/USD ATM Strike Compression

4:39 PM 3/19/2007
Due to the “Win/Loose” characteristic of the binary, VIX plays the greatest role in the instrument’s valuation at the 9am, 11am, 1pm and 3pm time frames as they are all 1 hour left until expiration and choice cut for time premium trades.

The Strike Compression attempts to spread a stop-loss position, in this example a $6,650 margined position at 50%, against a HS position of 4 contracts valued at $50, when the strike is slightly OTM to the price at the time the binary is put on. The ATM strikes compress time values, like going through a wormhole, as HS deltas explode. 

The example to the left shows the cash position’s stop-loss netted to the binary position. The upper right purple quandrant reflects the net amount the cash is negative until it breaks event above .0008. The purple shaded under HS shows Cash netted against the HS loss, but this is all. The real spread advantage is the larger font figures down below the HS purple range. If your system ranges > 8 pips, then this makes sense for the cash-sensitive.

CONCLUSION: If your system requires that you hold a cash position, why not open up your trades to capturing short term ATM spillage? A lot of HS member also appear to set OTMs that blow through the ATM and then exit at pre-determined ITMs. Either way, using expiry or compression, large orders in noisy markets would benefit from this phenemona.

  

Filed under: stop-loss

New York Stringer Magazine’s take on Hedgestreet’s binaries

David Katz of New York Stringer Magazine makes the following observation regarding the regulated trading of binaries at Hedgestreet.com.

The option premium…represents the investor’s view of the odds that the event will occur.  HedgeStreet is careful to avoid the use of the terms “bet”, “odds”and “winnings”;  as a regulated exchange, they are eager to avoid being mistaken for a gambling enterprise. Their mission is, in fact, to bring the advantage of hedging instruments, previously only available in large denominations, to the retail market

The implications of offering these type of derivatives teeters on that edge of gambling when such short-term (2 hour) options are “trading” at-the-money. “Trading” is in quotes because, at this time, the volume in binaries is thin or non-existent. Binaries are virtually indistinguishable from a wager when, say, a 1.3325 10am strike binary is at $50 at 9.55 am when the EUR/USD is at 1.3325. At worst, if the underlying was for a small-traded stock with light volume, this would be manipulation; at best, even in FX, its a gamble.

So how does Hedgestreet’s regulated binaries overcome this perception? Its only a matter of time. In the late 1970’s when the first equity indicies were traded, and also in the 1980’s when the International Swaps and Derivatives Association came out with their contracts, the same gambling-mentality existed. As most people in the ISDA and managed-money know, derivatives are merely risk-management tools fitted to achieve certain objectives in one’s portfolio. Those institutions, too, endured the same challenges that Hedgestreet.com is experiencing.

Anyone in the financial world will depict — in hindsight — the higher rate of return equities provided over bonds and money markets going back 50 years. However, go back 50 years ago, were those money managers making the same observations? Those who cite history merely underscore the need for equities  — the beginning, crude form of derivatives — in ones portfolio. And as the 1980’s and 1990’s showed, mutual funds, hedge funds, equity options and ETFs were developed along the way. Hedgestreet.com seems no more different than the outgrowth of these products and services. The chasm they have yet to bridge is the retail suitability. As Katz points out, this indeed presents itself as a “mission.” And in that respect, naysayers will eventually dismiss the exchange as “gambling”, especially in its present form.

Filed under: Forex, hedgestreet

MAJO’s Table 3/16

3:40 AM 3/19/2007 
S1’s highest support level , 3286, was surpassd at 5am, so the s1bine was calcuated at 3300. As expected, this 3300 level held in the 2 and 4pm session. The time premiums would have been high to compensate for such a low VIX.  Also, because all the news happened after 8:30 AM, one could of assumed the real R1 was achieved at 10am, since it was in R1 territory, thus selling the 12 noon 3325 bines. Another strategy would have entailed buying at anytime since the EUR was coming off S1 from Europe to NY sessions and selling OTM VIX, since it was going that direction, and it was going to dry up. 

Filed under: resistance, support

Pre-mature stop-loss hedge example

4:06 PM 3/16/2007
Stops are imperfect. I’ve blown up many a trade that continued in the right direction after my stop-loss was hit. In today’s trade, the sell short level was hit at 3318 but the stop-loss took me out at 9:40am at 3328.

A 12pm 3325 bine could of been implemented when the cash sell short was hit at 3318 at 9:15. At that time one could have been put in an order to sell the 3325 (yellow line) The theoretical price to set the sell should be near to stop-level. This was the midsection of the two Bollinger Bands (brown bands). The 12pm binary sold at 3325 would have closed at a profit. Depending upon your cash position, the premium may have covered the stopped loss. and then some. 

This strategy is only useful if your technical study experiences a lot of noise within ranges, trendlines or S & R levels. Rather than being wipsawed, bines could be entered to match/cover the loss. This gives you the flexibility to raise your stop-loss from the price action to maintain your position. But it comes at a cost. If VIX dries up, you losses would compound. Separate VIX models would need to be implemented to justify the success of this strategy.

Hedge funds may be okay with entering back into the market at losses, but if they have VIX on their side, the leverage of  binaries increases the speed more than the volume of return, like regular options, yet with a higher delta. 

Filed under: stop-loss

Liquid beta « Abnormal Returns | Binary Options

5:31 AM 3/16/2007

Reading Liquid beta « Abnormal Returns – identifies the extent in which capital is deployed. Greater technology and increased liquidity promote a more sophisticated culture. Naturally, this feeds on itself. The greater the intricacies between the components of liquidity and production, the greater the financial risk. Markets occupy larger spaces with varying density. Financial tools arise to balance the atmosphere between investment and production.

Filed under: FAQ