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Crude Oil
Almost every Wednesday, Crude Oil inventory reports are released at 10:30am EDT by the Energy Information Administration (EIA). The report measures the change in barrels of crude oil held by US companies. On Holiday weeks, like Labor Day, they report shifts to Thursday at 11am EDT. Futures traders and oil speculators tend to be very nervous before the release of the Crude Oil Inventory Reports.
The market tends to chop sideways in advance of the news, with very little upward or downward movement in price. When the Crude Oil Inventory Report is released at 10:30am, it’s not uncommon for the actual inventory reports to greatly miss the forecast projections from the analysts. And when that happens, there can be wild swings in the price of crude oil. Moves of 80 ticks or better are not unusual within a matter of minutes. The problem is that it’s impossible to know which way the market will move on the news, and it’s not always a logical response.
A strongly bullish report can elicit a strongly bearish response to the news. With binary options, you are making a decision about the likely direction of the market relative to a strike price within a defined time period. If the price of the asset you are trading agrees with your opinion at expiry, the trade settles for $100 per contract. If it doesn’t, the payout is $0. You can always exit a position early if you want to take a partial profit, or to minimize losses if the trade is moving against you. One strategy for trading crude oil inventory news is to place an Out-Of-The- Money (OTM) binary option trade on either side of the underlying indicative price before the release of the news. This strategy is called a “strangle”.
When you place an OTM BUY 60 ticks above the price of the market before the news release, it's possible to risk less than $25 to make $75 or more, per contract traded. Also if you place an OTM SELL at 60 ticks below the underlying, you can get the same risk/reward.
Here’s an example of how this strategy was used on Wednesday, January 13, 2016:
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Prior to the 10:30 news release, Crude Oil was trading at 31.58. Two OTM Trades were placed:
BUY Crude Oil >32.18 (11am expiry) $20 - $20 max risk for $80 max reward
SELL Crude Oil > 30.98 (11am expiry) $80 - $20 max risk for $80 max reward
There is a total of $40 maximum risk in this trade. For the trade to be successful, the price of Crude needed to move better than 60 ticks up or down on the release of the Crude Oil Inventory Report news.
At 10:30am EDT, the Crude Oil Inventory Report was released with a significant miss from analyst's estimates. Here is how the market reacted:
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The price of Crude Oil plummeted, dropping well below the SELL strike price within 2 minutes. With 28 minutes remaining in the trade, the SELL contract was already showing $70.25 profit out of a maximum of $80. The decision was made to take profit and bank a sure thing. $70.25 profit per contract in just 2 minutes, less the $20 loss on the BUY leg netted $50.25 per contract, or a 125 percent return on capital risked (exchange fees not included).
Natural Gas
Every Thursday at 10:30am EDT, The Energy Information Administration (EIA) releases the Natural Gas Storage Report, which measures the change in the number of cubic feet of natural gas held in underground storage during the past week. If the actual report misses estimates significantly, it can instantly result in result in large upward or downward moves in the price of Natural Gas Futures contracts. The question then becomes “Which way will the market move on the news?” Will it spike up, dive down or trade sideways? You could decide to sit on the sidelines and wait for the market to digest the news when it is released.
You could decide to place a trade in advance of the news. You could also choose not to trade Natural Gas on a news day. Let’s assume you believe that the Natural Gas Storage Report will miss estimates, resulting in a possibly significant price move on the news. Since there is no way to know what the news will be, you could decide to hedge your trade in advance of the news with two out-of-the money (OTM) trades. When you place an OTM trade, you risk less money for a greater reward, since you are at a disadvantage relative to the current price of the market.
Let’s take a look at an OTM trade on the Natural Gas Storage report released on Thursday, August 13 2015. The Natural Gas market traveled sideways at around 2.91 going into the 10:30 news release. At 10:21, just prior to the release of the news, two OTM trades were placed on either side of the market, with an 11:00am EDT expiry: If the market moves significantly in one direction other, one contract becomes more valuable, while the opposing contract becomes less valuable. If one contract expires in-the-money for a full profit, the other will expire out-of-the money for a loss. One trade acts as a hedge against the other trade. The worst case scenario is that the market doesn’t react to the news and trades sideways. In that event, the maximum loss you can incur in this example is $36.25 (exchange fees not included).
Here’s how this OTM “strangle” strategy played out.
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When the 10:30 Natural Gas Storage Report was released, it missed estimates significantly. Within five minutes, the market dove all of the way through the SELL strike price at >2.870 to around 2.850.
Two opportunities now presented themselves:
1. Exit the trade early and take profit, or
2. Let the trade continue for the remaining half hour and see if it expires at or below 2.870 for a full profit, bearing in mind that if the market expires above 2.870, the payout is $0.
The trade expired at 2.8456, allowing the SELL contract at >2.870 to expire in-the-money for a maximum reward of $86 per contract. The BUY contract settled out-of-the money for a payout of $0, resulting in a loss of the $20.25 risked on that trade. This resulted in a $65.75 profit (exchange fees not included). There are many strategies for trading the news, but an OTM binary options strategy gives you the opportunity to profit from large moves in the market without exposing yourself to excessive risk.
