Trading any option, whether Binary or Vanilla

So please do take the time to study, understand and include this vital piece of the jigsaw in your trading decision.
Let me also highlight another resource at the CBOE which is the IV Index. Again this is a free resource, and in this case can be used to provide a snapshot chart to which we can apply both historic and implied volatility. This offers us a perspective on the relationship between the two.

Historic is backward looking and implied is forward looking, and over time the two will tend to revert to the mean. In other words, if the two are diverging, we can reasonably expect the two to converge in due course. If implied volatility is significantly above the historic, we can expect it to return to the historic mean by falling. Equally, if the implied volatility is significantly below the historic, then we can expect it to return to the historic mean by rising. You can find all of this information in the Tools menu under Volatility Optimizer.

Simply click on the link for the IV Index. On the right hand side of the page you will find a volatility chart. Enter your instrument in the Symbol finder, and the appropriate chart will then be displayed. Before we leave the CBOE site, the exchange also offers two binary instruments. These are the BVZ and the BSZ. The first is a binary option on the SPX, and the second is a binary option on the VIX, which perhaps suggests we may see more on exchange binary instruments as the market develops. Whilst these binary options do have some similarities to those from Nadex, there are several important differences.

First, you will not be able to trade these directly with the exchange, only through a regulated options brokerage account. Second, they are quoted in option chain format with puts and calls in the same way as for vanilla options. This means you can buy and sell both puts and calls. When selling, you receive income in the same way as an options writer in vanilla options. The difference here is that any downside risk is limited to $100 as a maximum per contract.

Third and last, these options are only quoted currently with monthly expiries.In terms of the binary quote itself, this is from 0 to 100 in 1 cent increments, so each binary option contract is cash settled to $100 or $0, and you can close the option at any time before expiry. The options chains for the BSZ are quoted in five point strike price intervals, whilst the BVZ quotes in one point strike intervals.

The above binary options have much in common with vanilla options, and as your experience trading binary options grows, are well worth a longer look.Before we conclude this chapter on volatility, let me introduce one further aspect of price behavior which I believe is a less mathematical way of interpreting volatility, and is based on a type of chart we use for trading. This is the tick chart, as opposed to the more conventional time based chart.

Here we are removing the time aspect from our chart, which you may think is ironic given the focus we have placed on time. Imagine for a moment you are standing at the edge of an open outcry pit – the sort of pit that was once commonplace and filled with traders, all wearing brightly colored jackets. It is minutes to the open of the exchange and the tension is building. All is quiet.

The bell rings, the market explodes, and the pit is enveloped in a cacophony of noise. Testosterone fueled traders yell and scream orders as fear and greed drive prices. As the crescendo rises so does volatility, and equally as it falls, so the pit calms.A market in full cry is a sight to behold, and is a visual expression of volatility. If the pit is quiet with little activity, you can be assured the market is also quiet.

If the pit is roaring, the market is in full cry and prices will be moving fast. And just as standing outside a football stadium will give you some idea of the score simply from the noise of the crowd, so standing watching the pit will give you a view of whether there is activity or volatility.As trading pits have declined in favor of electronic trading, so traders have had to find other ways to ‘sense’ this activity, and one such is to us a tick based chart.

A tick chart is the closest we can ever come electronically, to replicating the pit on our desktop. Let me explain.A tick is simply a trade, and each time an order is placed it registers as a tick, irrespective of size. A 100 tick chart will therefore display the price action over 100 trades or ticks. And at this point, you might say… so what. The ‘so what’ is this. A tick chart is devoid of time in the sense that each tick bar or candle forms in a time dictated by the speed of the market.