How to Book Fast Gains Off Big Market Moves
Some markets are more capable of bigger percentage moves than others. We can use that data to guide how likely we were to see payoffs with in-the-money vs. out-of-the-money binary options.
In short, an index that sees a lot of 5% weekly moves is a better target for out-of-the-money binaries than indexes that regularly move just 1% or 2%.
Today, I’d like to expand on this idea. Instead of covering just one year of data, I’ve updated my numbers to cover from January 2009 until today.
The bar chart below shows the number of times the S&P 500 closed the week up or down by the given percentage points. The first column on the left shows that since January 2009, there have been approximately 55 weeks in which the S&P 500 closed just 1% or less from where it started.
Take a look at the rest of the breakdown:
The S&P shows a predilection to move less than 3% per week. But we see a few 3%-4%, and 4%-5% moves have occurred. There are even a fair amount of oversized 5% moves.
The German DAX’s weekly ranges are similar to the S&P’s but, not surprisingly, have shown a greater frequency of weekly moves above the 3% range.
Now look at the Nikkei 225 Index. Nadex does offer weekly binaries on the index (as Japan 225 binaries), but we’ve rarely touched them. The chart shows why:
The Nikkei 225 has very low frequency of moves over 3%. This suggests that when we do trade the Nikkei as a weekly binary, it’s better to stick with range trades than breakout trades.
I think this next chart is very exciting. It shows the movements of the Shanghai Index.
Just look at all that movement! It shows the greatest potential for big moves — ending the week with moves greater than 3% with greater frequency than the S&P 500 and the DAX!
Right now Nadex doesn’t offer binaries on the Shanghai Index. But at my suggestion, IG Markets has started to offer binaries on the Index in Europe. Soon they will be ported to the United States, so hopefully we can get in on the action!
So for now the question is, how can we apply this information to the S&P 500, DAX and the Nikkei?
My expanded data shows that bets that the market will move 5% from the spot on Monday to the end of the week are a very low probability. Swings like those require some exogenous event, like the earthquake in Japan or surprising central bank intervention.
These happen but are not predictable.
Still, the distribution of big moves is frequent enough to suggest that deep-out-of-the- money plays can pay off.
As I said, we can’t know for sure when these big moves will occur. But there is a way we can anticipate them. Anecdotally, big moves come after a period of low-percentage weeks. That is, when markets are moving slowly, they are due for a big move. Inversely, when markets move big, they can’t sustain many more big moves.
Incidentally, I am working on data showing the interplay of big percentage moves and small percentage moves. It could prove helpful in pinpointing exactly where and when these reversals will occur. Expect to hear more on that.
Sincerely,
Abe Cofnas
for The Penny Sleuth
Related Posts
Abe Cofnas
Abe Cofnas has been a full-time analyst of global currency trading for over twenty years and ranks among the top Foreign Exchange (Forex) traders working today. He has written three books on the subject. The most recent, Sentiment Indicators was published in 2010. Cofnas is the managing editor of the Fear & Greed Trader, Agora’s primary source for currencies information. He has also been Futures Magazine’s Forex Trader columnist since 2001, having written over 100 pieces.
Start your free Tomorrow in Review email subscription...
We Will Not Share Your Email AddressWe Value Your Privacy
ShareThis
