Binary options tunnels, also known as range bets or binary options corridors, are all-or-nothing contracts that settle at 100 if the underlying is inside the strikes at expiration, or at zero outside the strikes.
Binary Options Tunnel in a nutshell
- Traders set upper and lower price barriers in a binary options tunnel strategy and then predict if the price will remain within this range during a set time frame.
- Binary options tunnels settle at 100 if the underlying is between strikes, zero otherwise.
- High implied volatility might concern tunnel buyers, especially during holidays.
How is the Binary Options Tunnel Value calculated?
You can calculate the value of the binary options tunnel in a way that is more like a traditional call spread by subtracting the value of the lower strike price binary call option from the value of the upper strike price binary call option. Here, the buyer predicts that the underlying will be between the two strike prices at expiration.
Implied volatility may seem excessively high to a binary options tunnel buyer because, for example, several holidays are coming up and traders’ attention is likely to be distracted from trading and more focused on other things. On the other hand, selling the binary options tunnel would be appropriate if the speculator believes that the market will become more volatile.
Example: How to use the Binary Options Tunnel Value?
Let’s take a look at an example to understand how the tunnel value is used in binary options trading. Let’s assume a trader believes that the market will be less volatile might estimate that the price of a financial asset at maturity will be above 1250 only 15% of the time, which means that the binary call should be worth 10 ticks less than it is now. Accordingly, the binary put of 1150 should be valued at only 15, and the binary call of 1150 should be worth 85. In contrast to the current market forecast of 50%, this would imply a binary option tunnel price of 70, indicating a 70% chance that the underlying will be between strikes.
The trade is a directional play, as the buyer assumes that the underlying will move in the direction of the strikes if the binary option tunnel was out of the money when purchased. If a trader believes that the market will rise with the underlying, he can buy the binary call 1250 for 25. The trader could sell his binary call at 50 and exit with a profit of 25 if the market rises to 1250 and the trader is correct. He could also stay in the position and wait until the underlying rises to 1300. At that time, he could sell the 1350 binary call for 25.
Taking organized positions, like the tunnel, can become a crucial part of a binary trader’s daily strategy. The tunnel, the binary each-way call and the binary each-way put are strategies with two strikes. These binary options trading strategy offers one of the best chances to take profit, and opening loss-free positions with high control-rates.
