Metrics are used in binary options trading to make the best possible predictions about what will happen in the market. While no binary options trading indicator alone can guarantee you the success of a trade, Tunnel Theta is still a remarkable help if used accordingly. In this article, you will learn why.
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Tunnel theta in binary options trading
First of all, let’s look at what Tunnel Theta is.
Generally, it measures at what rate changes occur in a binary options tunnel. In other words, mathematically, Tunnel-Theta indicates the first derivative of a fair value until expiration.
Mathematically, Tunnel-Theta can be represented as:
Tunnel-Theta and its use in a chart
Let’s look at the tunnel theta of binary options in terms of the time remaining until an option expires. Here, the utility of this metric becomes clear.
Suppose the 25-day binary options theta profile is flat and has a very small theta. Furthermore, suppose the Theta is close to zero in the 10-day theta profile. In that case, there is a high probability that buying between strikes is beneficial and outside strikes are unfavorable. Consider using other metrics to predict whether you should place a bullish or a bearish trend.
Tunnel Theta: A helpful metric that should never be used alone
Although Tunnel-Theta is a helpful metric for mathematically evaluating an investment decision, it should not be used as the sole indicator. It is much more critical to predict the market direction. Therefore, it is important to add implied volatility to make a more informed investment decision.
Once implied volatility has fallen to a point where it is below 15%, the theta profile between strikes becomes zero. What we can observe here is very interesting. Despite the drop in volatility, the profiles between strikes initially equalize before dropping back toward zero. This can be a useful entry point for traders to speculate that the price range will move within this range.
See other tunnels here:
Find more articles in my Binary Options Glossary.