Binary Options Duke of York definition and price profiles

This post is published by Hamish Raw of

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!

The Grand Old Duke of York

The binary options Duke of York is a volatility trade, as is the standard binary options eachway tunnel, but with the binary options Duke of York there are a further four strikes providing five different settlements levels, not counting the ‘dead heats’.

The example offered in Figure 2 is of the British £ v US$ Duke of York strategy which settles at 0, 10, 30, 60 on the way up ‘the hill’ and 100 at ‘the top of the hill’, and of course 60, 30, 10 and 0 on the march back down.

GBP Vs USD Binary Options Duke of York Price Profile at Expiry

Figure 3 illustrates the binary options Duke of York price profiles over time with 10% implied volatility. Midway between the central strikes the strategy could be considered a theta play when there are 25-days and 8-days to expiry since time decay has a positive effect on the price over a wide range of the underlying. When there are 3-days to expiry at 1.60 the binary options Duke of York has a fair value of 74.5 which would create a 3-day return of 34.23% should ‘cable’ not drift more than a cent either side, i.e. below 1.59, above 1.61 at expiry.

Although the 0.01-day profile has a step-like profile resembling Figure 1 the other profiles are smooth with high points midway between the central strikes. These profiles could easily be mistaken for a short straddle position except for one salient difference, short straddles create unlimited downside risk whereas the binary options Duke of York’s losses are capped.

When there are 3-days or less to expiry, with the underlying outside the lowest and highest strikes the binary options Duke of York also provides a directional play with substantial deltas as measured by the gradients of those price profiles. So, at 1.64 the 3-day profile has a fair value of 13.54 which on the underlying falling 2¢ to 1.62 rises to 48.3. If the underlying continued to fall and settled between 1.59 and 1.61, i.e. a fall of between 3¢ and 5¢, the Duke of York would return 100/13.54―1=639%.

GBP vs USD Binary Options Duke of York Price Profiles – Time to Expiry

As with Figure 3 with theta, the binary options Duke of York provides the opportunity to take a position on the future implied volatility. If with the underlying at 1.60 the punter is of the view that volatility will fall then they would need to buy the binary options Duke of York. At 18% implied volatility the strategy is worth 42.92 so if the punter buys the Duke of York and volatility falls to, say 14%, then the option is worth 52.2 and the punter ‘trousers’ a profit of 9.28.

GBP vs USD Binary Options Duke of York Price Profiles – Implied Volatility

Evaluating the Binary Options Duke of York

The Binary Options Duke of York is calculated by:

Duke of York       =       100 x

(Payout1 x Binary Call(K1) +  Payout2 x Binary Call(K2) +

Payout3 x Binary Call(K3) +  Payout4 x Binary Call(K4) ―

Payout5 x Binary Call(K5) +  Payout6 x Binary Call(K6) ―

Payout7 x Binary Call(K7) +  Payout8 x Binary Call(K8))

where K1 is the lowest strike and K8 is the highest plus:

K+ K+ K+ K= 1 and K+ K+ K+ K= 1

The binary options Skyline strategy takes this concept a stage further with a different numbers of strikes on the way up as to on the way down, with the difference between the strikes changing also.

About the author

I am an experienced Binary Options trader for more than 10 years. Mainly, I trade 60 second-trades at a very high hit rate.

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