The commodity markets which include petroleum, metals, and grains are extremely volatile products that make them excellent underlying instruments to speculate on using binary options. Binary options, which are known as above or below options, have a leveraged payout to investors based on the investor picking the correct direction of the market during a specific period of time.
The most active binary options on commodity products are oil. Oil offer excellent fundamental and technical strategies that can be used to trade these markets using binary options.
Oil
Oil prices fluctuate with global macro flows, and can experience implied and historical volatility that are as high as 50%. This means that during the course of a year, the price of oil can move within a 50% range. During the last 6-weeks, from the beginning of May 2012, until June 13 2012, oil prices have declined more than 21%. With this in mind, and investor can see that the volatility associated with oil prices make it an excellent candidate to trade binary options.
Fundamental Oil Trading Using Binary Options
On a weekly basis, the Department of Energy releases inventory data, which reflects the current state of the oil markets. The release comes at 1430 GMT on Wednesday unless there is a US holiday on Monday or Tuesday. Analysts generally generate expectations, which will drive the markets if the inventory numbers do not meet expectations. Traders within the energy space analyze the energy stock which shows how much excess crude oil is available for use. The energy department also releases demand levels which are also market movers.
The weekly fundamental numbers can represent opportunities for traders to speculate on the direction of the oil market based on a inventory number that catches traders off guard.
Technical Oil Trading Using Binary Options
Oil prices move in a quick sharp manner, which makes them excellent candidates to trade binary options. Oil prices generally trend and break after consolidation patterns. One of the best ways to trade oil binary options is to use a break out method.
Each technical analyst has a different style of creating a break out. There are sloping trend line break outs, as well as horizontal trend line breakouts. Most of these styles are somewhat subjective, which makes it important for a trader to become comfortable with the style before risking capital.
Sloping trend line breakout
A trend line represents areas of support and resistance for a financial instrument. Binary options traders should use these areas to define levels in which the market is breaking out of a range. A sloping trend line can be a subjective trend line or it can be a trend line where specific criteria are used to generate the trend line. In the example above, the trend line is generated by connecting a low, surrounded by 3 higher lows, to the next low, which is surrounded by 3 higher lows. This technical strategy was developed by Tom DeMark, and is called a DeMark trend line.
The signal on this type of trend line is triggered when the market (in this case oil) closes below the slope of the trend line created by the DeMark lows.
The reverse can be used on a downward sloping trend line on an upward breakout. An analyst can connect a high surrounded by 3 lower highs to the next high, surrounded by 3 higher highs, to create a slope which can be used as the trigger point.
Horizontal Trend Line
Similar to the sloping trend line, the horizontal trend line defines support and resistance levels. Generally, significant levels of support and resistance surround horizontal trend lines which should be carefully watched by binary option traders.
Horizontal trend lines work best on longer term levels for a financial instrument. Weekly and daily units of measure capture a more robust level of support and resistance. Hourly and minute charts are very short term in nature, and therefore breakouts above resistance and below support usually foreshadow small accelerations of market movements.
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Summary
Oil is one of the best instruments to use to trade binary options. Having a weekly fundamental data point to trade around combined with an instrument that trades very technically, provides excellent opportunity to trade longer and shorter term binary options.
Oil also provides a tool that can be used to take a view on the general macro environment. Oil prices rise when growth is strong and decline when growth is weak. Additionally, OPEC semi-manages the oil market by changing production levels. Dramatic changes in production will alter the balance of the market and create opportunities for binary option traders.