NADEX

[drownpruf]

I can't really contribute on the same level of knowledge that sle and drownpruf has on this subject..

..but I do see an flaw in your 'delta == price' argument, jackieo79.

All your visual examples appear to be comparing the delta of a given strike to the 'BID' price of the digital, not the midpoint.

Coincidence or not, if you're saying the delta is the 'fair' price, then the MM's pricing that market should be making their spread padded around the supposed 'fair' price... not bidding directly at the price you pointed out and offering it 4 units higher. That would suggest an asymmetrical pricing error.

So with that, you should seriously consider what drownpruf and sle are saying.

I use it all the time when modeling vanillas and 2*delta for pricing touch options (shit approx). It fails when pricing local (approaching the barrier) and forward. As vols rise(fall) deltas converge(diverge) to(from) ATM values. Would you want to buy a flat-vol modeled 30/100 digital for a skewed 40/100 price? Therein lies the utility.


Anyway, I am done sparring. I am on the West coast and it's already late for me. I've gotta be up at 7am EDT to monitor my EURUSD DNT.

 

[jackieo79]

Some are bid some are midpoint. Bid/ask spread alone can account for it etc.. But really my goal is not how would i price a binary to make a market. It is simply to obtain a simple approximation of fair value. Meaning is it hugely skewed. It is accurate enough...Yes I 100% agree there are much more complex models that can give a finer granularity of accuracy. I'm not arguing that at all. He has advanced formulas that can also be used and hey I will even say probably better so for pricing. I have a few as well that work better. I'm totally cool with this. Either way the binaries price does line up with the delta quote and does make for a quick simple accurate approximation method of value.

I can't really contribute on the same level of knowledge that sle and drownpruf has on this subject..

..but I do see an flaw in your 'delta == price' argument, jackieo79.

All your visual examples appear to be comparing the delta of a given strike to the 'BID' price of the digital, not the midpoint.

Coincidence or not, if you're saying the delta is the 'fair' price, then the MM's pricing that market should be making their spread padded around the supposed 'fair' price... not bidding directly at the price you pointed out and offering it 4 units higher. That would suggest an asymmetrical pricing error.

So with that, you should seriously consider what drownpruf and sle are saying.

 

[jackieo79]

I don't trade touch binaries..not yet legally available to us residents.. as you stated you go through a friend and a vpn or something like that..... I just use the its at 20 its a fair approximation and when it hits it it will be at 47 etc.. We both have models...yours works for you mine works for me. Sounds like we are both going to be okay

Bring on the interest rate conference and states on GBP and EUR - Good Trading to you in the AM

I use it all the time when modeling vanillas and 2*delta for pricing touch options (shit approx). It fails when pricing local (approaching the barrier) and forward. As vols rise(fall) deltas converge(diverge) to(from) ATM values. Would you want to buy a flat-vol modeled 30/100 digital for a skewed 40/100 price? Therein lies the utility.


Anyway, I am done sparring. I am on the West coast and it's already late for me. I've gotta be up at 7am EDT to monitor my EURUSD DNT.

 

[jackieo79]

Finally we agree on delta and digital price.

See no reason to argue on forward probability also stated it was not an exact method.

You won me over on similarity as stated a few pages back with kudos involved as it progressed to you of the similarity. They are not the same. But yes I already conceded to this a few pages back. I did this in my binary versus binary comparison. Ive said it a few times do you understand that I do now see the similarity. Of course I will change my tune just as you have on delta and digital price (or at least are now admitting to using as a "quasi" approximation.

Though bottom line on all the post I don't see the practical application you are trying to provide here. We both are judging fair value etc..I simply like the model as it helped me wrap my mind around a simple way that a binary is priced and how it changes... You are going for arbitrage models and ideal scenarios and seems you are very good at it and take down brokerage houses and all that. That is sweet!

However, to be blunt, if I can buy 100 contracts at 20 and sell them back at 47 and make $2700 less an $18 fee in less than 2 hours well that is good enough for me. Or better yet if I can buy 100 contracts at $70 (with a stop loss at $50 when if underlying hits strike) and let time and movement against and for me be in my favor taking profit at $95 and do this a few times 1-2 x an hour and just trade for a couple hours. Then even better. Personally that is more than enough and I am just glad I found something that works for me that is not complex.

My goal is to post what I have learned, correct what I have seen as inaccurate, learn things that may help me improve as a trader, Improve does mean change not just "accept" someone says your wrong. Thank you for taking the time I have learned about the correlation in pricing models between the verticals and the binaries, though the insults could have been put aside.

Im okay with you on the whole thing of vertical similarity, kudos yet again. As noted for multiple reasons they are not better but regarding similarity in pricing models I agree. Verticals lack of granularity, lack of continuous expirations, exercise risk, higher fees simply make them not my preferred vehicle of choice. So though the theory does seem sound the bottom line for me is I can't get verticals every night for a few hours and collect max payout etc..so they personally don't' work with my style of trading.

jackieo79,

The delta = digital price is an approximation that nobody disputes, but you cannot ascribe the model delta to a forward digital probability, period. You stated it was inviolate only to change you tune.

You stated that the vertical and the digital are "completely different instruments" which is incorrect. You want to brush it off, but 70% of this thread is you disputing vertical = digital

The granularity of strikes in vanillas makes empirical proof difficult to generate. It would require a strip of narrow strikes to reproduce in lieu of a discrete, dime-wide that is not available in listed-volatility. It can be easily replicated with an OTC price -- something akin to say... a dime-wide vertical on a $30 underlying using any pricing model you like.

 

[SIUYA]

an interesting read....

Please anyone - for my own clarity - correct me if I* am wrong.

These NADEX binaries are basically a bet on the delta** of a strike?

thanks.
///////////////////////////
*(I am an old school option trader, the models and maths I understand but have no interest in as first and foremost you need to find someone willing to take the other side at reasonable prices , and there are far better arbitragers than me out there. )

* *(lets say approximate delta as you can change models or model variables to get what ever you like and market maker skews will also vary based on liquidity and supply and demand etc; but essentially as at expiry depending on the underlying there are either 0 or 1)

 

[drownpruf]

Yeah, you can use it. Understand the difference between delta and probability.

The idea of a large number (contracts) of narrow verticals to solve for the payoff. The analogy of the vol-swap replication using a strip of options used to replicate. Nobody does it when you can trade the var-swap.

The digital's PNL mark is analog until the moment of expiration. A strip of discrete verticals, or preferably a very narrow width vertical is used to replicate in the vanilla world.

 

[jackieo79]

A bet if you want it to be... i prefer to trade... (chart based trading, expected ranges based on vol as i am not holding to expiration] closing the trade for a profit before it expires - or exiting the trade to limit the loss before it expires - the delta will rise fall based on time passing, vol changing, price changing... as will the price of the binary. The will be the same (give or take a few ticks)

Yes at expiration they are 0 or 1.00 but don't hold till then not wise...

They can skew volatility all day - i still get to choose if i think its going up or down and if i can make my 1:1 with the range based on the price set
But if they skew it to much they will create arb against themselves... i trade them day and night and dont have issues. IV will usually rise before news events etc.. but that is normal as in all options. Beyond that the pricing model is acceptable and tradeable and the liquidity at least for someone not trading 1,000's of contracts at one time which would be 20k plus in most cases per trade.. it is fine.

The biggest edge is using the ATM for a target exit on an OTM or a target stop loss on an ITM

So understanding delta, gamma, theta impact on delta, vol impact on delta etc.. helps one better grasp the pricing model. Though honestly you don't have to grasp it to trade them effectively. But it helps the option trader wrap their mind around it easily. If you use ITM binaries - think its going up buy exit at ATM for stop loss or the inverse - sell ITM exit if it goes up atm as a stop loss. This allows you to maintain a good risk/reward ratio with probability in your favor - by probability in your favor i mean....



if market is at 1000
i buy at 980 strike with 2 hours till expiration

the market can stay flat - i profit
the marekt can move up i profit
the market can move down and settle 1/10th of a tick above 980 and i profit
the market could fly down and move back up an settle 1/10th of a tick above 980 i profit
the market could fly down and say down i lose to limit risk the market cold move down and i exit atm to minimize risk and lose

so i could be right about price, wrong about price, right about time, wrong about time, right about price and time, only if i am wrong enough about BOTH price and time do i lose on the trade

it does not have to be complex though - keep it simple that is what works... and exit before expiration!

an interesting read....

Please anyone - for my own clarity - correct me if I* am wrong.

These NADEX binaries are basically a bet on the delta** of a strike?

thanks.
///////////////////////////
*(I am an old school option trader, the models and maths I understand but have no interest in as first and foremost you need to find someone willing to take the other side at reasonable prices , and there are far better arbitragers than me out there. )

* *(lets say approximate delta as you can change models or model variables to get what ever you like and market maker skews will also vary based on liquidity and supply and demand etc; but essentially as at expiry depending on the underlying there are either 0 or 1)

 

[gkishot]

A bet if you want it to be... i prefer to trade... (chart based trading, expected ranges based on vol as i am not holding to expiration] closing the trade for a profit before it expires - or exiting the trade to limit the loss before it expires - the delta will rise fall based on time passing, vol changing, price changing... as will the price of the binary. The will be the same (give or take a few ticks)

Yes at expiration they are 0 or 1.00 but don't hold till then not wise...

They can skew volatility all day - i still get to choose if i think its going up or down and if i can make my 1:1 with the range based on the price set
But if they skew it to much they will create arb against themselves... i trade them day and night and dont have issues. IV will usually rise before news events etc.. but that is normal as in all options. Beyond that the pricing model is acceptable and tradeable and the liquidity at least for someone not trading 1,000's of contracts at one time which would be 20k plus in most cases per trade.. it is fine.

The biggest edge is using the ATM for a target exit on an OTM or a target stop loss on an ITM

So understanding delta, gamma, theta impact on delta, vol impact on delta etc.. helps one better grasp the pricing model. Though honestly you don't have to grasp it to trade them effectively. But it helps the option trader wrap their mind around it easily. If you use ITM binaries - think its going up buy exit at ATM for stop loss or the inverse - sell ITM exit if it goes up atm as a stop loss. This allows you to maintain a good risk/reward ratio with probability in your favor - by probability in your favor i mean....



if market is at 1000
i buy at 980 strike with 2 hours till expiration

the market can stay flat - i profit
the marekt can move up i profit
the market can move down and settle 1/10th of a tick above 980 and i profit
the market could fly down and move back up an settle 1/10th of a tick above 980 i profit
the market could fly down and say down i lose to limit risk the market cold move down and i exit atm to minimize risk and lose

so i could be right about price, wrong about price, right about time, wrong about time, right about price and time, only if i am wrong enough about BOTH price and time do i lose on the trade

it does not have to be complex though - keep it simple that is what works... and exit before expiration!

I am curious, you buy 2 hours until expiration. What time before expiration do you sell? How do you overcome bid/ask spread + commissions in such a short time?

 

[jackieo79]

Like everyone else i sell higher than I buy and buy back lower than I sell (well at least i hope to). Delta/binary is going to be 0 or 100 at expiration regardless of having a week, a day, 2 hours or 10 minutes to expiration. Closer to expiration higher the gamma faster the delta (price) moves so its easy to overcome the bid/ask spread and fees. It actually takes more on any option binary vertical or otherwise to overcome bid/ask spread and fees the further you are from expiration as more movement or time is required.

I will buy or sell binaries that expire with 2 hour or less less. I rarely would ever do this at the top of the hour so often i have less than 2 hours and am usually in and out on average in about 30 to 45 minutes. Sometimes in 3-5 minutes covering bid ask spread and fees.

I need chart confirmation of a buy or a sell entry. Then I ensure there is a strike at the level i would use for a stop as I am doing mainly In The Money binaries on short term expirations so i will look at current hour and next hour expirations at ITM strikes only..

I don't exit based on a time I exit based on the price I am in the money time is working for me.

I am looking to enter around 70 to 75 on a buy and looking to enter at 25 to 20 on a sell.

I will exit both if thy hit 50 (which will happen if the market at any time hits/touches the strike). this allows me to lower my risk versus taking on the full risk.

I set my take profit on a buy at the highest price of 96 ( may take profit sooner if i see that the price difference on the binary price ladders shows i can take profit say at 94 10 ticks sooner on an underlying move etc..) So i set a take profit but then i monitor the binary price ladder to see if I can optimize the exit price. On a sell i will take profit at the lowest price of 4.00 again i look at the price ladder to see if that looks like the best choice.

The binary will be at 0 or 100 in 2 hours at a max. So the movement is not hard and it can go from 70 offer to 95 bid in minutes etc.. making the bid ask spread easy to overcome. The fees are .90 per side an capped at $9.00 so my fees per contract get lower and lower the higher my volume. But either way the fees are manageable even if just doing 1 contract.

Crude Oil/CL moved from 70 (ask on right side) to 96 (bid on left side) in less than 20 minutes easily covering bid/ask spread and fees ($26 profit after bid/ask spread - less $1.80 in fees - if doing just 1 then $24.2 on a similar 1 to 1 risk using stops

On a 100 contracts I would make 2600 after bid/ask spread - $18 in fees $2582 net in 20 minutes...

US 500/ES - took about 25 minutes - also it did the same movent but in reverse from top to bottom... (hence why i get out at 50 whether i am doing ITM or OTM binaries) - OTM to take profit - ITM to take stop and limit risk)
in this case have the buy at 70 and sell at 94 (bid was so high ask stopped quoting as you can't buy at/above 100 or if you could it would be a bad idea)

USD/CAD short at 25 bought back at 6 took about an hour and 25 minutes

USD CHF bought at 70 out at 94 less than an hour

I can enter exit before expiration. The other side of the trade (market maker or trader) does not know if i am getting in out winning loosing like on any other exchange. The fees are lower than verticals and the bid ask spreads are comparable. Plus I can do these every hour or two versus a few times a week as close expiration faster gamma affects delta price. heavier I can place bids and offers inside the bid/ask spread etc.. as well. Using ITM binaries odds are in your favor as stated above.

I can show you more extreme examples of price movement being larger and faster but these are just moderate normal moves that I use to trade every hour well more than enough to cover bid/ask spread and fees. - this happens all day long -

I am curious, you buy 2 hours until expiration. What time before expiration do you sell? How do you overcome bid/ask spread + commissions in such a short time?

 

[kinggyppo]

maybe you can post a couple of real time trades may be helpful to see your execution style and what products you are trading.