Big Surprise Behind Big Binary Profits

If you don’t know what a binary option is, I strongly urge you to find out. These “yes-or-no” investments are easy to understand, inexpensive to buy and quick to play out.

For instance, you can buy a binary saying that a currency will by above a certain rate. You can bet whether it will be above that rate in a few hours, by the end of the day or even the end of the week. If you’re right, you win — collecting double- or even triple-digit profits.

But even though plays are set up every day and even every few hours, I make most of my weekly Strategic Currency Trader recommendations Monday morning. Why?

The answer is one of the most powerful movers of binary options… and a concept that could lead to super-sized opportunities next week. Yes, I mean super-sized even compared to the kinds of gains my readers are seeing with binary options now!

The key word is “surprise.”

Simply put, currencies make their biggest moves when something surprises the markets.

For instance, last week the Financial Times reported an unexpected fall in the United Kingdom’s inflation rate. Its CPI in March increased 4%, down from 4.4% the month before.

The immediate reaction was a drop in the British pound.

The move was easy to understand: There is growing fear around the world about rising inflation. Central banks typically fight inflation by raising interest rates. Higher interest rates make a currency more attractive. And the expectation of a rate increase brings in speculators who hope to ride the currency up.

So the sudden revelation that Great Britain wasn’t actually seeing much inflation took its toll. As James Knightley, an economist at ING Bank, told the FT, “The prospect of a May rate hike has been significantly reduced by today’s surprise drop in UK CPI.”

Keep in mind, investors weren’t reacting to the absolute value of the CPI. For instance, the Bank of England’s (BoE) official inflation target is 2% — meaning March’s number is double what the BoE wants. But investors aren’t paying attention to that.

Instead, it’s all about currency economics 101 — the value of a currency rises or falls based on expectations of inflation. If inflation expectations are strong, the market sees an increased probability of the central bank increasing rates.

But it would be a mistake to perceive the GBPUSD reaction as simply a local U.K. event. The fact is, this is the open salvo leading to a much bigger surprise — one that is just a week away.

For now, however, all you need to know is how to put surprise to work for you. It may sound counterintuitive — after all, by definition you cannot plan for a surprise. But that’s not entirely true… especially when it comes to binary options.

On Monday morning, I scan over 20 binary contracts with over 100 strike prices. I sort through them using a sophisticated algorithm. Then I narrow them down to just plays with the biggest reward-to-risk ratios. After that, the real work begins.

You see, it’s not enough to find binaries that offer outsized profit potential. Any binary selling for under $50 is a chance to double your money… but you’ll want to have more going for you than that. That’s why I use technical analysis to show where prices could go, based on proven patterns and cycles.

Still, success or failure depends mostly on surprise.

That’s because a binary’s price reflects investor’s expectations. Every binary has chance to pay out $100 — and no one is going to buy it unless they think it has a chance of paying off. An option that has a trading ask price of $80 tells us the market expects there’s an 80% chance the binary will settle in-the-money.  In contrast, an option that costs $25 translates to 25% market expectation of success. But the other side of that is a potential 4:1 return, just for being a contrarian.

That’s why I like making binary plays on Monday morning. Coming out of the weekend, market expectations are likely to be at the height of error. The crowd-mind is most likely to be wrong because there are five days of unknowns. But my charts highlight the most likely moves. So if the market is caught by surprise, we enjoy high roller returns!

If you’re not familiar with binaries yet, you can read the brief tutorial I wrote for the Penny Sleuth just a few months ago.

Sincerely,
Abe Cofnas
Penny Sleuth

April 19, 2011

Big Surprise Behind Big Binary Profits was originally featured in the Penny Sleuth. Check out Wall Street’s 5 Most Profitable Penny Stock Patterns Report.

This story was originally featured on Penny Sleuth.

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