Binary Options Timeline definition and price profiles
This post is published by Hamish Raw of https://hamishraw.com/
The binary options Timeline is a great binary options strategy. It challenges the trader to get their timing right but for the less gung-ho punter it also gives them a second bite of the cherry.
In financial markets timing is everything; anyone can claim to have called the market correctly if they wait long enough. But there is a downside to waiting as that most noble and erudite Englishmen, Lord Keynes, pointed out in one of his more insightful moments: “In the long-run we are all dead”! The binary options Timeline rewards the trader in accord with the trader’s timing of entry. The binary options Timeline is the trade guaranteed to test not only the traders directional forecasting, but more importantly the trader’s prowess in timing.
The binary options timeline is akin to a conventional call calendar strip. The strategy is made up of a series of one touch calls with the same strike but different expiry dates. The incremental payout is a function of the number of expiries and is equal to 100 divided by number of expiries, i.e. an increment of 25 reflects 4 expiry times, an increment of 20 reflects 5 expiries.
Figure 1 shows the stepped reduction in settlement prices.
1. If the level of the Hang Seng hits 22000 during the first day then the binary options Timeline immediately finishes and settles at 100. If the level of the Hang Seng does not trade at 22000 during the first day then…..
2. …..if the level of the Hang Seng hits 22000 during the second day then the binary options Timeline immediately finishes and settles at 75. If the level of the Hang Seng does not trade at 22000 during the second day then…..
3. …..if the level of the Hang Seng hits 22000 during the third day then the binary options Timeline immediately finishes and settles at 50. If the level of the Hang Seng does not trade at 22000 during the third day then…..
4. .…..if the level of the Hang Seng hits 22000 during the final day then the binary options Timeline immediately finishes and settles at 25. If the level of the Hang Seng does not trade at 22000 during the final day then…..
5. ……the timeline settles at 0.
Figure 2 is an example of the Hang Seng 22,000 Timeline which takes Figure 1 and further adds an axis with the Hang Seng level.
The bottom left axis displays the days to expiry. The time increment determining a settlement price decrease is one day. The right hand axis shows the Hang Seng Index price. The binary options Timeline peak of 100 indicates that the Hang Seng index reached 22,000 with over 3 days to expiry. As the time to expiry decreases the maximum level at which the Timeline can settle decreases by 25 each day.
The above example is for four days duration but could work just as easily for one-hourly bets with time increments of fifteen minutes. Alternatively, the strategy could be set so that the time increments are monthly but start in, say, 112 days as Figure 3 illustrates.
Implied volatility is an important input to the Timeline since the higher the volatility the greater the chance of the strike being breached. In Figure 3 the implied volatility is set at 20% where at 112-days to expiry the Timeline is worth just 4.87. On purchasing this binary option the Hang Seng has 22 days to rise to 22,000 and hit the jackpot (100), a return of 1,953%. But if it missed that timeline but hit the 22,000 mark with 30+30+29=89 days to expiry then the binary options Timeline settles at 75, a return of 1,440%. And so on with settlement values of 50 (927%), 25 (413%) and 0 (-100%).
Say in Figure 3 the Hang Seng is trading at 20,920 and a speculator feels that, one the market is a bit ‘toppy’ and two, the market is going to go through a quiet patch for a few months. At 20,920 the above 22,000 Timeline is worth about 50 with implied volatility set at 20%. Therefore this strategy at inception can be equated to a toss of a coin in terms of losing his stake, i.e. there is a 50:50 chance that Hang Seng will travel up to 22,000 within the next 22 days. The time passes and the underlying does not change and the Timeline is now valued at 36.89 since the maximum loss is reduced to 25, i.e. 75 settlement price less price of 50 Timeline at inception. With the passing of another 30 days the Timeline’s maximum settlement price becomes 50 and the trade cannot lose.
But what are the implications of implied volatility changing on the above two trades? Figure 4 illustrates a decrease in implied volatility to 5% (a bit drastic but this for illustration purposes) while Figure 5 illustrates Figure 3 with 35% implied volatility.
The jackpot 1,953% return is a forlorn dream and for the Timeline to be worth 4.87 with 112 days remaining the Hang Seng has to travel up to 21,042 from 18,520 in a day (as unrealistic as the implied volatility falling by 15% to 5% but serves to make the point that the level of volatility one enters the trade can have a significant impact on its returns).
The seller of premium at 50 has called the market correctly. With Hang Seng unchanged at 20,920 and 112 days remaining the Timeline is now only worth 2.7 with a rise in the Hang Seng to 21,720 needed for the Timeline to still be worth 50.
Figure 5 illustrates that with 35% implied volatility how the above long and short premium trades have fared. The Timeline has increased from the 4.87 to 20.9 while the writer at 50 has seen his short premium position cost 18.7 ticks as that Timeline is now worth 68.7.
The Timeline vega is an important consideration when weighing up when to weigh in to this strategy. It is clearly head and shoulders a better trade than a straight forward binary call option for taking a view on volatility or taking in time decay since there is no risk reversal consideration, i.e. a short vega or theta position cannot turn into a long vega or theta position above the strike. Arguably it is also a much better instrument than a conventional call for trading vega and theta, especially when writing conventional call options, owing to the potential unlimited downside risk of such a trade.
The above examples work well for indices, but the nature of the binary options Timeline suggests that it may have particular attractions for those trading STIRs. For example, a rise in US rates is in the pipeline but no one is exactly sure when the Fed may act so this strategy could attract major interest in the Eurodollars futures and options market.
Prior to oil breaching the $100 mark there was months of speculation as to when this momentous event would take place; the binary options Timeline would have been the perfect speculative instrument.
Evaluation of the Binary Options Timeline
The binary options Timeline is:
Timeline = (One-Touch Call(T1)+ One-Touch Call(T2)+
One-Touch Call(T3)+ One-Touch Call(T4)) / 4
or should there be 5 time periods:
Timeline = (One-Touch Call(T1)+ One-Touch Call(T2)+
One-Touch Call(T3)+ One-Touch Call(T4) +
One-Touch Call(T5)) / 5
where T1……T5 are the separate times to expiry of the binary options one touch call.