The Duke of York is a volatility trade, like the typical binary options either-or trade. However, instead of counting dead heats, four more strikes provide five alternative levels of settlement. Traders can strategically place bets on outcomes at 0, 10, 30, 60, and 100 on both the call and put sides of the trade.
Although the 0.01-day profile has a step-like profile similar to this, the other profiles are smooth, with the high points halfway between the central strikes. The only notable difference between these profiles and a short straddle position is that a short straddle carries infinite downside risk, while the Duke of York’s losses are limited.
Duke of York binary options offer the same opportunity to speculate on future implied volatility. The trader would need to buy the Duke of York binary options if he expects the volatility to decrease with an underlying asset.
If the gambler buys the Duke of York and the implied volatility falls to, say, 14%, then the Binary Option is worth 52.2, and the gambler makes a profit of 9.28. If the implied volatility is 18%, the binary options strategy is worth 42.92.
The Grand Old Duke of York
The grand old Duke of York, He had ten thousand men.
He marched them up to the top of the hill
And he marched them down again.
And when they were up, they were up;
And when they were down, they were down.
But when they were only halfway up,
They were neither up nor down!