Out of the Money (OTM) trades with Nadex offer the opportunity to make significant profits on very little money risked. Since the probability of OTM trades expiring successfully is low, it is important to have a strategy that predicts a significant breakout or a reversal in the markets.
Today, the S&P 500 futures dove over 27 points between the 9:30 EDT Opening Bell and 11:30 EDT on worries over Greece, China and a broadening US Trade Deficit. Would the market bounce off support, or continue its free fall?
I looked at the the US 500 market on the daily charts, 4-Hour charts and smaller time frames. It looked like the market would find support at 2040. If support held, I was expecting a bounce off support. The MACD was showing that a potential reversal was imminent on multiple time frames. It was time to be patient and wait for a reversal to develop.
The area around 2040 had been tested several times over the past few days.It was time to see if it would hold again. I swithched to the 5 minute and 1-minute charts around 11:30 looking for signs of a reversal. After the market started to reverse on the smaller time frames, the MACD showed a reversal on the 15 minute charts.
That was my trigger to BUY on the reversal. Now the question was where would my strike price be? I could place an In-The-Money (ITM) trade below 2040, risking $70 to make $30. I could also place an At-The-Money trade (ATM), risking $50 to make $50.
But I didn't entirely trust the market, so I opted to place an Out-of-the-Money (OTM) risking $20 to make $80 per contract. Psychologically, I like placing trades like this when the markets are acting crazy. I have very little money risked, for a potentially large return. But OTM trades need a good trigger, like a reversal, a strong continuation move, or a news event to accelerate the movement of the market.
Here's how today's Morning "V" trade played out:
Just before 11:30am EDT, the Market showed signs of reversal on the smaller time frames. The 15 minute Charts were showing a bullish crossover. Stochastics were on the rise. Now it was time to find a strike price that gave me the OTM risk/reward I was looking for. I bought 5 contracts to BUY the US 500 Index at 2050, risking $20 to make $80 per contract. Within one hour, the market climbed up and through the 2050 strike price. At that time, I was already up $100, and I could have exited the trade for a 1:1 risk/reward ratio.Now I had a decision to make: Do I cash out and take a $100 sure profit, or should I let the trade continue and collect more premium? All indicators were still bullish, so I switched to a smaller time frame, and was prepared to exit on a hard reversal. I felt that the 2054 area might act like resistance, so I was prepared to exit at that price level. The market started to show signs of reversal.
I cashed out at around 2054 for a gross profit of $211.25, less $9.00 in exchange fees. Here are the transaction details:
I bought 5 contracts, risking a maximum of $100 to make a maximum of $400. As crazy as markets were behaving, I was quite happy exiting the trade early for a profit of over $200. If I had allowed the contract to expire at 4:15, it would have settled for the full $400 profit. But that was by no means certain when I chose to exit.
Finding OTM trading opportunities with Nadex offers low risk for potentially high reward. These trades can be really fun when they work. Today's trade counted on a bounce off support, and the formation of a "V" pattern. If that didn't happen, I would have exited the trade quickly to minimize losses.
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Important Note: OTM strategies only work if the markets are poised for a strong reversal or breakout. If a reversal or breakout doesn't happen, you will likely lose most or all of your capital risked. Fortunately, in this case. $20 per contract was a maximum risk worth taking.
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Breakfast, Lunch and Dinner Trades with Nadex
Cam White, TradingPub
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