Top 3 Reasons to Use Binary Options to Trade European Markets
James Ramelli / Independent Trader
It is difficult for a trader based in the U.S. to speculate on potential movement in overseas markets. The time difference makes it challenging but there are also a number of other dynamics that make it hard for trader’s to manage risk and profits in positions tied to markets overseas. This can be frustrating for traders who want to have exposure to these markets and the catalyst events specific to them. When U.S. markets are at a lack for macro catalysts overseas markets might be the only place a trader can find interesting opportunities. For example, the upcoming French elections will surly act as a catalyst for many European markets but for equity traders in the U.S. it can be difficult to find a way to trade this catalyst. However a trader who is familiar with binary options would have no problem finding speculative opportunities in European markets that provide them with a much better risk management capability than they would be able to using other instruments.
Here we will discuss why Nadex binary options are the great way for traders to participate in overseas market catalysts like the French election. We will examine the three main reasons a trader should consider using binary options over equities or ETF’s, and then will look at some trade examples.
- Binary Options Lower Gap Risk: Although there are many ETF’s with exposure to European markets they are generally difficult to manage from a risk stand point. Many ETF’s that track foreign stock indices show a tendency to gap from open to close. This makes it difficult for a trader to manage their overall risk in the position and also means that a trader cannot be confident that their stop loss orders will hold up. These funds can gap for a number of reasons. Some of them are thinly traded and can see large moves in price due to a lack of liquidity. They can also gap because the catalysts for foreign markets are happening overnight while U.S. listed equities aren’t trading. Binary options solve this problem two ways. They trade overnight, so a trader would be able to monitor and exit their position as the markets are moving, rather than having to wait until the open the following day. The limited risk nature of the contract also means that a trader cannot lose more than their initial investment, so a trade knows exactly what their risk is at any given time.
- Binary Options Give a Trader Access: While there are dozens of ETF’s and other exchange traded products that a trader could use to get exposure to overseas markets none of them allow a trader to speculate on these markets with the same risk dynamics. Traders can trade contracts that settle against FTSE 100, DAX, Nikkei 225 and China A50 Futures. There are also contracts that settle against a number of forex pairs. This means that a trader can speculate on these markets while taking advantage of the superior risk management capabilities binary options offer.
- Ability to Set-Up Complex Trades: In addition to exposing a trader to gap risk listed ETF’s do not give the trader the ability to trade more complex trade setups. Binary options can allow a trader to speculate on more than just directional movement in these markets. A trader could use the options to set up positions that profit on lack of movement in underlying markets, larger than expected moves in underlying markets along with a number of other directional and non-directional strategies. This allows a trader to be more dynamic in their approach to trades. For example if a trader believed that the elections would not have much of an effect on European indices they may choose to get short volatility by using binary options to fade the expected movement. This is a strategy that would be impossible for at trader to replicate using listed ETF’s.
With binary options providing a clear advantage to a trader looking to speculate on foreign markets we know that we can approach catalysts or other trading opportunities with far better risk management capabilities. Let’s go over an example below to further illustrate the advantages of binary options.
The Liffe FTSE 100 Index Futures are trading around 7150
A trader in the U.S. believes that the Liffe FTSE index can get to 7175 by the end of the day on Friday. How can they approach this trade?
They can trade an ETF but it would require a large amount of capital to hold the position and will not provide a trader with a very good reward to risk setup when they are only expecting a small move by the end of the week. Let’s look at a binary options trade setup.
Trade: Buying the FTSE 100 > 7150 Weekly Binary Options for $40 expiring on Friday
Risk: $40 per 1 lot
Reward: $60 per 1 lot
Here we can see that the trader is given a better than 1-1 reward to risk ration and also has a guaranteed maximum risk level of $40 per 1 lot. This also shows us what type of reward to risk setups we can get in binary options compared to ETF’s and equities.
With a number of catalysts on the horizon for overseas markets, European markets in particular a trader should consider expanding their knowledge of binary options. These products allow traders who otherwise wouldn’t be able to speculate in these markets the opportunity to actively trade them. If you are interested in these markets you should definitely look into Nadex binary options.
Nadex Risk Disclaimer
Trading on Nadex involves financial risk and may not be appropriate for all investors. The information presented here is for information and educational purposes only and should not be considered an offer or solicitation to buy or sell any financial instrument on Nadex or elsewhere. Any trading decisions that you make are solely your responsibility. Past performance is not indicative of future results. Nadex instruments include forex, stock indexes, commodity futures, and economic events.
Nadex binary options and spreads can be volatile and investors risk losing their investment on any given transaction. However, the limited-risk nature of Nadex contracts ensures investors cannot lose more than the cost to enter the transaction. Nadex is subject to U.S. regulatory oversight by the CFTC.