If you believe a market is going to be volatile on a given day, or over the next few weeks and months, you can back your view with a CFD binary or an option.
In this way you are trading volatility itself. Even if you are not convinced what direction the market will move, you can make money once there is an up or down move (you are buying 'volatility' in a market, rather than buying or selling the underlying market).
At IG Markets 'volatility trades' can be placed using binaries and/or options.
Volatility trading with binaries
Trading volatility is an advanced binary trading strategy which allows you to take advantage of future volatility levels. For example:
'Buying volatility' on the Aus 200
The Australia 200 is one of our popular markets and is based on the cash price of the underlying index, the ASX200.
You believe the ASX 200 will have a big move after the Australian unemployment figures are announced. So you decide to buy A$10 per point of both the 'Australia 200 to finish up more than 50 points' binary at a price of 8-11, and the 'Australia 200 to finish down more than 50' binary at a price 6-9.
So, you have paid a total of 20 points (11+9) to back a 50-point move on the Australia 200 in either direction. If the Australian unemployment figures move the index as much as you expect and it finishes the day up more or down more than 50 points, you make 80 points:
100 (all binaries will settle at 100 if the event occurs)
- 20 (this is what you paid for a 50-point move in either direction)
= 80.
As you bought A$10 per point, your total profit is A$800 (80 x 10).
If you were incorrect about the Australian unemployment figures and the index does not finish up or down 50 points, you would have lost A$200 (20 x 10) as all binaries will finish at 0 if the event does not occur.
Either way you cannot lose more than A$200 (the amount you paid for a 50-point move in either direction) no matter happens to the ASX. All binaries have a strictly limited risk. In this above example you are 'buying volatility' on the Australia 200, rather than simply 'buying' or 'selling' the index, which you would do with a more traditional daily trade.
'Selling volatility' on the Aus 200
You can use binaries to benefit from markets when you expect there will be no movement at all.
The Australia 200 is currently trading at 4600 and the market is quiet. You don’t believe the index will move any higher than its current level, so you sell A$10 per point of a daily OneTouch trade - the ‘Cash Australia 200 to touch 4630’ at 40. By doing this, you have ‘sold volatility’ on the index.
If the Australia 200 fails to reach more than 4630 by the end of the trading day, you will make A$400 (10 x 40)
If the index breaches the 4630 mark before it closes, you will lose A$600 (100-40 x 10).