Double binary options always involve two assets, enabling traders to support directional views for both and earn a significantly higher return compared to individual trades.
How does the pricing of double binary options work?
The pricing of double binary options works by assessing the probability that an asset’s price will meet two specified strike levels at expiration. So, double binary options require both elements of the bet to win successfully. Thus, in the double-call bet, both S1 and S2 must be above their respective strikes of K1 and K2.
This financial instrument can offer a remarkably high rate of return to speculators who wish to combine forecasts on two different assets into one instrument.
A double call with rho = 0 would be equivalent to a double bet on two racehorses competing in different races.
Using standard binary calls poses problems because there is a constant risk of reversal. With doubles, the risk is even higher.
What role do deltas play in double calls?
In double calls, tunnel deltas are always positive, providing consistent directional exposure.
The profiles show that rho has a “delta” but is of limited value because rho is a constant and a value derived from statistical analysis (similar to historical volatility). The closest one can come to a short rho hedge is to hedge the underlying pair in a delta-neutral manner. However, an avid “rho-neutral” speculator can “flatten” more effectively with conventional and binary options.
The downside is that with single bets, each can win individually and make an overall profit, but with a double call, both must win to cover the initial investment. Again, the decision ultimately depends on the risk tolerance and persuasiveness of the trader.
What are gold/oil doubles?
Gold/oil doubles involve trading strategies where implied volatilities of gold and oil are derived from binary options on stocks, evolving from traditional options markets. The rho above is assumed to be zero. One could buy the double call and sell the individual gold and oil binary calls if one believes that gold and oil have a positive correlation.
Since they are not path-dependent, they are suitable for comparing different binary calls and puts. It is possible for a trader holding a “double” position to use binary calls and puts to hedge both sides.
Rho is a crucial factor in evaluating double bets. Similar issues arise when measuring the correlation coefficient when considering historical volatility, such as the appropriate time frame and frequency of sampling within that time frame.
Double calls and double puts are trading strategies for confident traders who believe they can accurately predict the future price level of two assets and thus benefit from better odds.
Double calls and double puts can also support the idea that a particular asset within a larger group of assets can perform worse or better than that basket of assets.