But that all changed in 2007, when a ruling from the Options Clearing Corporation opened the market for everyone.

Like most analysts, initially I was skeptical of the profit power of this undiscovered venue. After thoroughly exploring and analyzing these instruments, however, I’m convinced.

This new market is a total game-changer!

If you’ve been burned in the stock market, these instruments could bring you some much-needed income. They offer more than a way out of today’s extreme volatility — they actually let you cash in on the ups and downs that would otherwise rob you blind.

On the other hand, if you enjoy speculating, these instruments are a perfect thrill. They’re inexpensive, pay off quickly (in four days or less) and have strictly limited risk.

If you want a market hedge, this market has you covered, too. With a simple, low-cost trade, you can set yourself up for a payday if news pushes the rest of your investments the wrong way.

In short, these new instruments can help you no matter what your investment style or situation. And I truly believe that everyone should try trading them at least once in their life.

They’re called binary options… and I’ve made it my mission to spread the word about them…

Binary options are simple bets on whether something will happen or not. That’s it.

In a way, they resemble sports bets — like betting which football team will win on Sunday or if a baseball player will hit more than 30 home runs in a season.

Binaries, however, are bets on financial and economic events. They cover things like which way a commodity price will go, how far an index will move, even what a currency’s exchange rate will be.

You pay money to take the bet — called the premium. If your hunch is wrong, you lose your stake. But if your analysis is correct, you get your premium back plus a profit.

Binary options are big in Europe, and big U.S. brokerage institutions have used similar instruments for decades. But they were complicated affairs — created through a mass of jargon and legalese that would make anyone’s head spin.

But an idea this simple — and potentially market-changing — couldn’t be contained. So some brokerages pushed to offer these simple instruments to retail U.S. investors (guys like you and me).

In 2007, they got their wish. The Options Clearing Corporation and the Securities Exchange Commission allowed exchanges to offer regulated binary contracts.

Still, even with the approval, the U.S. binary market remains quite small. The American Stock Exchange and Chicago Board Options Exchange only offer a handful of binary options on a few stocks and indexes. Most brokerages don’t touch them, either.

That’s a real shame, because the global market offers a nearly infinite range of opportunities to put binary options to use.

Fortunately for American investors, one U.S. company understands that potential…

It’s called the North American Derivatives Exchange, or Nadex (www.nadex.com).

Thanks to its pioneering efforts, you now have a chance to make money with binary options — a field that once belonged exclusively to Wall Street’s bigger players.

Nadex offers a full suite of binary options, covering a nearly endless list of strategies and investments.

Until more brokers realize what they’re missing, the easiest thing for you to do is to open an account with Nadex directly.

That might sound like a big deal, but it really isn’t. The site is very user-friendly, and Nadex’s trading platform is one of the most flexible I’ve ever encountered.

(In case you’re wondering, neither my publisher nor I are affiliated with Nadex. We don’t receive any compensation if you open an account or not. It just happens to be one of the few binary exchanges in the United States.)

Another important caveat is that only U.S. citizens can open Nadex accounts.

If you aren’t a U.S. citizen, you will need to look into opening an account with IG Group, Nadex’s parent company, at www.igmarkets.com. It has offices all over the world that may be able to help you.

American citizens have nothing to worry about. In fact, you can instantly sign up for a free demo trading account with Nadex. They’ll give you $25,000 in virtual money to trade as you wish. It’s a 100% risk-free way to learn how binary options work and how quickly you could rack up wins…

Sincerely,

Abe Cofnas
for The Penny Sleuth

How Market Headlines Can Quickly Pay You Triple-Digit Gains was originally featured in the Penny Sleuth.

If you can find patterns, you can make predictions.

And with predictions, you can make winning trades…

The trick, however, is to understand that correlations can change. This is one of the shortcomings of relying on conventional wisdom.

For example, it’s conventional wisdom that currencies are highly correlated with commodity markets and key indices. And it is true that the currency-commodity connection is a major driver of market movements.

So it makes sense that oil prices mirror the value of the Canadian dollar, since Canada is a major oil exporter. Changes in the price of crude oil will impact the demand for Canadian oil, and therefore the demand for its currency.

And then there’s gold, which acts as a safe haven basket. When the equity markets tank, people retreat to the safety of gold. When people are optimistic, they jump back into stocks, abandoning gold. Therefore, gold reacts inversely to major stock indexes.

However, the problem with these enduring assumptions is that they can be misleading and are too general. Correlations are dynamic and endure many deviations during the year. So before you make a judgment about the market, it’s critical to update and confirm the latest correlations…

The direction of the correlation is equally important. A currency-commodity correlation could be low but turning back upward. Or it could be at a high but turning down.

The direction of the correlation trumps the actual correlation because it reflects the prevailing sentiment in the market.

A correlation that is increasing or decreasing means that expectations are changing in the relationship.

With that in mind, let’s explore some of these putative correlations.

We’ll start with the Canadian dollar and oil. Its correlation with U.S. crude is wide ranging. In this past year it has experienced a high 95% correlation before weakening to a just above 40%. Then it went back to about 80% levels in October and November, only to sharply descend below 0 correlation and was even inversely correlated for a while.

Today it’s back to the 74% level.

When we examine the JPYUSD and gold relationships, we can see how gold movements become critical in understanding market sentiment. When the yen increases in strength, so does gold. Both are acting as risk havens to market fear. The correlation reached its peak of 88% on Sept. 21 and then became 0% correlated in February.

As you’ve seen, there are times when a correlation flips into the opposite direction. This is a key inflection point and can be a leading indicator for expecting major changes in the currency price levels and directions.

The bottom line is that correlations are important to monitor and can become useful tools for detecting the shape of market expectations.

Sincerely,

Abe Cofnas
for The Penny Sleuth

A New Look at Currency Correlations was originally featured in the Penny Sleuth.

Let me show you how…

Yes, option investing can be intimidating. After all, the financial press blames derivatives (like options) for a major part of the financial crisis of 2008. Options move violently — and they can expire completely worthless. It’s no surprise, then, that most investors avoid options at all costs.

But when used intelligently, options can significantly increase your profitability by magnifying stock gains while limiting risk to your initial investment (unlike traditional leverage, which can actually leave you owing money).

To be sure, options can be incredibly complex. Today, we’ll just look at an overview of how options work — and how they apply to your next trade.

How Options Work

Basically, an option is a contract that gives its owner the right to buy or sell a stock at a predetermined price on a predetermined date. Buying call options gives you the right to buy shares of a stock at that price, whereas buying put options gives you the right to sell them at that price.

Time is an important factor for options. Options expire on the third Friday of each month (unless it’s a holiday, in which case they expire on the preceding Thursday) — that date, known as the expiration date, is a major contributor to the option’s value. The further that date is from now, the longer the stock (known as the “underlying”) has to increase in value. That potential value (known as extrinsic value) decreases as time passes.

An option’s real value is the difference between the strike price (the price you can buy or sell on the contract) and the price of its underlying stock. For an oversimplified example, let’s say that today is Jan. 1, and you own $10 March call options on General Electric. If GE currently trades for $15, the difference between the $10 strike price and $15 share price is the stock’s intrinsic, or real, value.

It’s the option’s real value because it’s the gain you’d book if you exercised the option today — think about if you use the option to buy GE shares for $10 and then resell them on the market for $15. That’s a $5 per share profit. But that option doesn’t trade for just $5 — because GE still has months to appreciate, the option may cost closer to $6. That possible extra dollar is the extrinsic, or time, value.

Options are interesting because of the size of their moves. If GE moved $2 higher, the company’s stock would have gained 13% — not bad for a blue chip. But our $6 option would have gained more than 33% in real value alone.

There’s a difference between being an options investor and being an options trader. Generally speaking, traders have little interest in holding onto options plays until expiration — I’m a fan of that camp myself. Instead, we aim to buy for a jump in our options’ prices and then sell for a gain…

So, how do you get started in the options game?

To start, look back at your trading portfolio and see what would have happened if you’d bought an option instead of a stock. By experimenting with how options would have impacted your profits after the fact, you can get a much better idea of how different strike prices and expiration dates impact option prices.

I would strongly advise against adding options to your portfolio until you have some experience paper trading them and understand more of the technical features of options. But as a starting point, experimenting with your past real world trades is a great way to flatten the learning curve.

I’ll show you some more options tricks in the coming weeks. If you have any options questions for me, send them to editor@pennysleuth.com.

Cheers,

Jonas Elmerraji
for The Penny Sleuth

An Option to Supercharge Your Gains was originally featured in the Penny Sleuth.

Today I want to share with you the three strategies I use when choosing my currency plays every Monday morning for my premium readers.

All three of these strategies revolve around the fact that the crowd is often wrong on Monday morning…

As markets open, traders are still digesting news from the weekend and figuring out what to expect in the days ahead. The thing is, without any actual trading data to rely on, they’re pretty much making blind guesses.

My sentiment indicators zero in on this uncertainty, giving us a glimpse into how it could develop as the week goes on. That’s where the strategies come in.

1. The Momentum Play: Our most basic play is the momentum play. It anticipates a specific direction the market will go during the week, using a single binary to play it.

For instance, we can expect Germany’s DAX index to go up between Monday and Friday. Or we could anticipate the Japanese yen to lose value.

Sometimes we’ll do a momentum play if we think the crowd’s sentiment is on target — reality will meet their expectations.

In February, my readers had the chance to play binaries in oil. Crude was selling for close to $97, but I predicted a sharp spike. To play it, I recommended buying a crude oil 100.25 binary — meaning oil would have to jump over $3 a barrel to pay off.

Since it seemed like a long shot, the binary cost us just $12. Oil prices spiked overnight… and by Tuesday are binary was worth $21. The prudent thing to do was sell the position and collect our 24-hour gains of 68%.

2. The Breakthrough Trade: Sometimes my sentiment indicators predict a big move… but can’t be sure of which way the move will go. So we can “bracket” the market with a breakthrough trade.

To do that, we buy a binary with a strike price above the current spot price, then sell-to-open a binary below the spot price.

For instance, on the morning of December 5, 2011, the DAX was trading at 6130. But that week European leaders were scheduled to meet to discuss a solution to Greece’s debt crisis. So it was pretty clear to me that the DAX would react.

Of course, the outcome of the European meeting wasn’t clear. Leaders could agree on a plan… or go home after reaching a complete deadlock. Since the market would react violently in either direction, we put on a breakthrough trade.

3. The Range Trade: The markets are always moving… but they don’t always move far. During a slow news week, for instance, prices can keep on a steady track as investors seek to figure out where things will go next.

If my sentiment analysis reveals the indexes, currencies and commodities that are most likely to stay put for the week, we use that information to put on a range trade.

The mechanics are the exact opposite of a breakout trade. You sell a binary with a strike price higher than the spot, then buy a binary with the strike price below the spot.

For a range play, you want both binaries to pay out. That is, for the spot to stay below the upper binary and above the lower binary.

The interesting thing is that there’s almost zero chance that the position will expire completely worthless — if one side loses, the other side naturally wins!

These strategies give you the best chance to make big gains while keeping your risk firmly in check.

Sincerely,

Abe Cofnas
for The Penny Sleuth

Three Ways to Score Big Using Sentiment Analysis was originally featured in the Penny Sleuth.

Fundamental analysis digs into a company’s balance sheet, looking for clues to how much a stock is worth… and how much it could be worth.

What comes out is an alphabet soup of stats and ratios — P/E, EPS, ROI, EBITDA, etc. Analysts compare them against other stocks or their own projections to see if the stock is oversold or undersold.

Technical analysis, on the other hand, ignores all of that. It only cares about the stock’s price and volume. Using sophisticated charts, analysts look for certain price triggers. The terms that come out of this field are no less arcane than the terms you’ll find in fundamental analysis. Stochastics, Bollinger bands, MACD lines, etc.

But over the past few years, both fundamental and technical analysts have hit a wall. Their entire dogma is falling apart, and markets have stopped moving the way these analytical tools say they should be.

That’s because, thanks to the Internet, EVERYONE has access to this data… and everyone “knows” how the data is supposed to move prices. Free charting services not only draw technical charts for you, they also explain what the readings indicate.

Complete fundamental analysis is just a click away, too.

You can’t make money if everyone is acting on the same information in the exact same way…

That’s not to say fundamental and technical analyses are no longer valid — just that they are no longer absolute. If they were, everyone would be rich.

Instead, you have two choices — you can dig even deeper into the numbers, looking for telltale data or patterns no one knows. Or you can look at the existing numbers in a brand new way.

Sentiment analysis does both.

You see, at his core, an investor doesn’t care about a company’s earnings. Lines on a chart aren’t important to him, either.

The only thing an investor cares about is if he is making money or losing it.

And now, with everyone making decisions based on the exact same data, that emotional drive is the only thing that moves the markets.

So I’ve studied ways to literally measure emotion. I focus on two indicators — “risk appetite” and “risk aversion.” (You could also refer to them as “fear” and “greed.”)

Essentially, risk appetite / risk aversion is the root of all investment decisions. After all, there are very few safe investments out there. And the ones that are safe don’t offer big returns. As they say, greater risks mean greater rewards.

If people are feeling confident about the economy, they will feel confident buying riskier assets. That means things like stocks, foreign currencies and other volatile but lucrative investments. Greed sets in.

If there is a lot of pessimism in the air, people will likely get out of stocks and exchange their foreign currencies for things like U.S. dollars, gold or other “safe” investments. Fear takes control.

Obviously emotions can’t be tracked easily by fundamental analysis or conventional price charts. So I use some unconventional methods.

For example, I’m pioneering the use of “text mining” — analyzing the actual language used in economic reports and articles to detect potential economic trends. The result is a “word cloud” — a visual aid to how many times a particular word is used. The more times the word appears, the bigger it will be in the word cloud.

So if the word “crisis” keeps popping up in a speech — no matter the context — it will be noticeable in the word cloud… offering a sign that the policymaker wants to address investor fears. Overuse of the word “recovery” could be a codeword to spark optimism, or risk appetite.

Take a look at this word cloud I generated using a statement from Glenn Stevens, Governor of the Reserve Bank of Australia.

Notice how large the word “inflation” is, meaning it was used often. Clearly it’s a big concern… indicating that Australia’s central bank will keep a close eye on controlling inflation with interest rates.

Binary options are a powerful tool — offering one of the most direct ways to play market sentiment. They’re inexpensive, work quickly and offer strictly controlled risk.

Every Monday, I use my sentiment analysis to figure out if investors are being too optimistic or too pessimistic. I then send my elite readers the best binary trades of the week.

Binary option trading is very addictive. Once you have a few wins under your belt, you may not ever want to stop.

Sincerely,

Abe Cofnas
for The Penny Sleuth

This Powerful Tool Trumps Traditional Analysis was originally featured in the Penny Sleuth.

For instance, the fundamental forces that cause currency valuations to change also cause equity valuations to change.

In other words, certain currencies and stocks are firmly linked… and there is no place to hide.

So this week, I’d like to examine some key intermarket relationships and the complex forces affecting them. I believe they pinpoint emerging trading opportunities.

First, let’s consider the Australian dollar…

Australia’s vast supply of raw materials means its currency’s value is linked to commodity market conditions. Strong growth in the global economy — or at least in a powerhouse like China — translates into higher demand for Australian resources.

But it isn’t easy for average traders to track and analyze everyday global conditions. There are just too many variables for a proper assessment. Luckily, there is a short cut.

Freeport-McMoRan Copper & Gold (NYSE:FCX) is “the world’s largest publicly traded copper company.” This year it is projecting to sell 3.8 billion pounds of copper and 1.6 million ounces of gold.

Therefore, as you can imagine, its share price can be considered a good proxy for global resource conditions. And also not too surprisingly, it has a very close correlation with the AUDUSD — the closest of any equity-currency pair.

The correlation percentage was approximately 20% in September, but now sits at 80%.

So if you’re trading the AUDUSD, watching FCX is a must. What does the chart tell us?

I believe the Aussie is now hesitating as to direction. If it moves within 2% of the recent highs of 107.63 or 2% above the recent lows of 1.015, it will become a very good binary trading target.

Let’s take a look at another example…

An enduring narrative of this year has been the strengthening yen, something the Bank of Japan has tried in vain to stall. Its interventions have merely had a temporary weakening effect, only to be rejected by the market.

In the coming year, whether the yen will weaken or strengthen will be a major theme for traders. An easy way to evaluate those prospects is to pay close attention to the share price of Sony Corp. (NYSE:SNE).

Looking at the chart, we can see that a stronger yen had a chilling effect on the valuation of Sony, reaching $19.

While we can’t tell which one is leading or following, a bullish change in Sony’s price action may be a signal of a weakening yen. If Sony starts reversing, the USDJPY will likely weaken. Sony at 19 will be correlated with the USDJPY at 80. I will be watching this relationship closely, so should you…

In general, looking at the key equity partner of a currency pair or an index provides important clues to future direction. There is more than what is seen at the surface. Always, ask yourself, are the co-movement patterns changing? Is divergence occurring?

Abe Cofnas
for The Penny Sleuth

Currency In Focus: Trading Opportunities on the Horizon was originally featured in the Penny Sleuth.

But first, it’s important to understand exactly what we’re dealing with when it comes to binary options.

Profiting From the Knows, the Unknowns and the Known Unknowns

To borrow a page from former Defense Secretary Donald Rumsfeld, traders must consider several degrees of truths. There are:

(1) Things we know about the markets
(2) Things we know we don’t know about the markets
(3) And things we don’t know we don’t know about the markets.

Let’s apply them to binary option trading.

What We Know: We know that the markets are headline-driven. Each headline about the U.S. road to non-recovery, the debt crises, Eurozone instability, global slowdown, Chinese growth projections, etc., all provide triggers that move the markets.

We know that these events trigger a cycle of emotions — fear, relief, euphoria, regret — and initiate crowd behavior. We also know that the crowd is wrong many times about market direction, especially at the beginning of the week.

What We Don’t Know: While we know markets will move, we don’t know for sure how far it will move in a given week… or sometimes even in what direction. We try to get an edge by using fundamental and technical tools and knowledge.

What We Don’t Know We Don’t Know: Obviously we can’t predict sudden surprise events… but neither can investors. This shows a fatal flaw in the theory that characterizes the market as being efficient. If it were, surprises would not occur.

But the fact that surprises can occur gives us an advantage.

How to Profit From Market Chaos

Most investors and traders have trouble dealing with these knowns and unknowns. One bit of news sends them running for cover while any optimistic news causes them to jump back into the market with both feet.

Thanks to binary options, you don’t have to take part in that fear and greed cycle. Instead, our knowledge of those forces sets us up for unique trading opportunities.

There are several strategies for using binary options to your best advantage, but I consider three to be absolutely key.

Protective Trades: Binary options can protect you from market sell-offs, such as a breakdown in S&P 500 or in the price of gold. Choosing binaries with strike prices 2% or so below the underlying future’s price often cost about $20-$30 and pay off $100. They don’t always work out… but when they do, they can offset losses in your stock/precious metals, etc., portfolio.

Anticipating Direction (The Greed Trade): You decide which way a price will go, then pick a binary option with a strike price that matches your belief. If the price goes through your target, your binary pays off.

The payoff here can be quite large — easily double digits and sometimes triple digits in just days. These trades involve a modicum of greed, because we are willing to take on the risk for the reward. The less you pay, the higher your risk, since a low price is a sign that the market does not believe the binary will be profitable.

That’s why we play deep-out-of-the-money binaries that cost about $20-$25 per contract. It’s a relatively low cost balanced with a better chance of returning $100. The results can be astounding, making these plays an exciting part of our binary option toolbox.

Anticipating Breakout (The Fear Trade): These plays anticipate volatility — something most investors fear most. Each week, volatility is almost a certainty as headlines shift sentiment. And the breakout trade strategy is the most consist way to profit from the up-and-down news cycle.

I predict a lot more fear in the markets — and hence many more opportunities for fear-based breakouts.

If you missed my original tutorial on binary options, simply click here. And, if you haven’t already, I suggest you check out the Nadex website here.

You can try the Nadex demo account. It’s an easy and risk-free way to get a real-world feel for binary options… and if you do, I would love to hear how you did. Feel free to shoot an email to editor@pennysleuth.com.

Sincerely,

Abe Cofnas
for The Penny Sleuth

Collect Weekly Profits From Market Chaos… was originally featured in the Penny Sleuth.

As you know, last Monday morning saw cautious optimism pushing Germany’s DAX index higher. Then Tuesday, it reversed direction when German Finance Minister Wolfgang Schäuble said the upcoming European summit might not fully resolve the crisis. But by late Tuesday, sentiment changed again when The Guardian reported that France and Germany had agreed to make over $2 trillion euros available to bail out banks.

For chartists who swear by technical analysis of price patterns, these kinds of swings have shattered the notion that price action reflects some kind of rationality of expectations. And while the longer-term view of fundamental analysts has predicted these breakdowns, they have been unable to provide a reliable timeline.

Of course, traders need actionable knowledge. That’s why I have worked hard to develop a new type of analysis to anticipate these swings. I call it sentiment analysis — more reliable than reading technicals, and more precise than following the fundamentals.

The fact is, as we’ve seen on a weekly basis, we can learn a lot from the never-ending herding behavior of the crowd. In many ways it’s a kind of biomimicry.

Traders, like birds, follow each other and form collective bullish or bearish flocks, where no one wants to be exposed to the market predators. But just like a flock of birds, amid the “safety” of the group, crowd-mind takes over. Waves of optimism and pessimism cause the crowd to react on instinct, selling or buying for little reason other than that the others are doing the same thing. Massive price swings are the result.

Sudden moves like those are practically immune to pure technical or fundamental analysis.

That doesn’t mean they’re always a surprise, though.

Using one of my favorite sentiment analysis tools — word clouds — can help make some sense of the moves by providing further insights into the underlying character of problem.

As you may remember, a word cloud is a visible representation of word frequency in a speech or document. The more time a word is used, the bigger it appears in the cloud.

Let’s compare and contrast two speeches, one by Evangelos Venizelos, Deputy Prime Minister and Minister for Finance of Greece, and one from September by German Finance Minister Schäuble (whose words of doubt sent the DAX reeling last Monday).

What is striking to me in the word cloud of Venizelos’ speech is the globalization of the Greek problem. Take a look:

Other than the expected key words such as “debt” and “economy,” the words “international,” “Eurozone” and “global” have important emphasis. Also notice that the word “crisis” is very small. And we don’t see too many prominent verbs referring to reducing or solving the problem.

Looking at the cloud brings to mind an old adage: “When you owe the bank a small amount of money, it’s your problem. When you owe the bank a great deal of money, it’s the bank’s problem.”

As the cloud reveals, Greek debt is indeed a Eurozone problem.

In contrast, the world cloud of Schäuble speech features a key word strikingly absent from the Greek cloud. See if you can spot it:

It’s there on the left-hand side — the word “must.” This distinction between the Greek and German perspectives reflects perfectly the traditional German preference for discipline. Yes, to the Germans, the Greek problem must be solved. The question is whether it can be solved by political leadership or by the market.

By the end of this summit, the new word that we may become familiar with is “Merkozy” — a portmanteau of German Chancellor Angela Merkel and French President Nicolas Sarkozy’s names as they attempt to work as one mind to avoid a political and economic catastrophe.

Without a breakthrough, the further risk of a global contagion is very large.

The coming days are critical. It is exasperating to the traders and those who watch and analyze the markets using outmoded methods. But it creates the kind of turbulence that we welcome as binary option traders.

There is uncertainty in the outcome, but there is certainty that the path to a resolution won’t be linear or predictable. Understanding that there will be sudden shifts is the key to binary profits!

Sincerely,

Abe Cofnas
Currency Analyst for The Penny Sleuth

Word Clouds of the Gathering Debt Storm was originally featured in the Penny Sleuth.

Surge-and-sell market turbulence can be translated into a quantifiable property known as volatility. Once we “map” volatility, we can trade it more effectively. The trick is that there are a lot of ways to measure volatility.

I won’t bore you with all the technical aspects of it. But I do want to clear up a common misconception. Some people believe that the opposite of volatility is no movement at all. That is not true. Consider the human heartbeat. If it’s steady at 65 beats a second, then the volatility is zero. That doesn’t mean it’s standing still!

No, volatility is when the rate of change in movements becomes extreme.

For a look at what that means for technical charting, check out the chart below. It shows the co-movements of the AUDUSD’s one-month volatility against the AUDUSD spot.

They are in tandem, with peaks and troughs in volatility pointing to reversals of the price direction. So when a volatility spike shows up, it’s a good time to bet on the underlying investment going the other way.

For a more focused reading of volatility, we can use volatility smiles.

Volatility smiles are a type of charting that provides a shape for investor fear and greed. It represents the volatility of options at different distances from the spot price. If market volatility were neutral, charting the volatility values for puts and calls would form a shape like a smile.

In reality, however, volatility smiles are few and far between. Most of the time, sentiment favors one side or the other. When one side is being favored, instead of a smile in the volatility curve, there’s a skew or smirk.

Lately most option market are NOT smiling.

For instance, last week a chart for crude oil showed a big skew on the put side. Premium prices for puts were more expensive than calls at the same distance from the at-the-money spot price. It was a clear signal of very bearish conditions. Volatility levels for options were in the 50% range. It wasn’t parabolic, but it was sufficient to warn that it was time to look at the calls side of oil.

Last week the three-month volatility surface shows a change.

Notice the shape has begun to curve up on the call side. It is no longer purely bearish. Traders are beginning to shift their sentiment away from extreme bearishness on oil. This tells us to not be afraid to look for buying opportunities in oil.

Now take a look at the USDJPY volatility smile.

The volatility of the calls is balanced by the volatility of the puts — nearly a perfect smile. For the same distance from the spot, the volatility of oil is five times the volatility of the USDJPY. This clearly provides evidence that investors have ambivalent sentiment on the direction of the USDJPY.

If you’re still not convinced about using volatility smiles as a measure of market sentiment, look at the volatility smile of the Chinese Renminbi.

Does the market sentiment expect it to strengthen or weaken? There is a clear and very steep skew to the call side. But the put side is also coming alive. Take notice — this may mean that bets on a stronger Renminbi in the near future are not that certain!

The trading action implications in following volatility smiles are clear. They are signatures of the war between bullish and bearish sentiment. When there is a skew to one side, it’s not a predictor of a reversal — but it is a warning of a potential reversal. When the volatility surface moves away from a smile, the conditions are ripe for betting the other way.

Ultimately, the market tries not to be skewed in one direction for too long. You can and should bet on that.

Sincerely,

Abe Cofnas
Currency Analyst for The Penny Sleuth

Measure and Invest in Market Fear With a Smile was originally featured in the Penny Sleuth.

The answer is, more often than you think.

And today I’d like to share my in-depth research that proves it. The charts below show you the number of weeks that a commodity or index has moved a percent or more over the year.

This lets us see which markets have a tendency to make the biggest moves. And that information can help guide us to winning binary plays.

Today let’s take a look at how often big weekly swings occur in some of our favorite markets, along with some general thoughts on how to use this information.

S&P 500

Between Aug. 6, 2010 and Aug. 26, 2011, the S&P 500 has seen a weekly move of 1% in either direction a total of 17 times. It moved 2% in either direction nine times. It moved 3% in either direction four times. And the biggest moves, jumping or losing 4-5% in a week, occurred just four times in total.

That means we can generally expect 1% moves to happen frequently, which favors at-the-money binary options. On the other hand, it also shows that bigger swings aren’t out of the questions, which can make deep-out-of-the-money binaries smart bets.

Gold

The weekly closes support the sentiment that gold can move big in either direction. From Aug. 6, 2010, to Aug. 26, 2011, gold had 11 weeks where it closed up more than 1%; 12 weeks where it closed up more than 2%; six weeks where it closed 7%; one week where it had a close of 4%; and two weeks it had a close of 5%.

So in general, you’d be better off buying deep-out-of-the-money binaries than selling near- or out-of-the-money gold binaries.

WTI Oil

West Texas crude oil is one of the most interesting in this bunch. It really shows a capability for big moves. There were nine weeks where it closed 1% in either direction; nine weeks where it closed 2% or more; 10 weeks where it closed 3% or more; three weeks of 4% moves; and an extraordinary 11 weeks where it closed 5% or more

That is movement! And it proves that crude oil binaries can have some of the most surprising outcomes of all!

Perfect Conditions for Trading Binary Options

The implications behind this data are huge. It shows we have market conditions where we can “expect” big moves during the business week. The Monday through Friday life of binary options fit perfectly with these market conditions.

A 2% move in these markets during any week, in either direction, with the right binary option strike price, can translate into gains of over 100% returns again and again.

If you haven’t already, I urge you to try a Nadex demo account. It’s an easy and risk-free way to get a real-world feel for binary options.

Just go to www.Nadex.com. It only takes a few minutes to get started.

Sincerely,

Abe Cofnas
Currency Analyst for The Penny Sleuth

Currency in Focus: Big Market Swings That Could Lead to Giant Binary Wins was originally featured in the Penny Sleuth.