How to trade Binary Options against a bucket shop

Hakuna Matata

Well-known member
357 209
you will need 2 accounts with the bucket shop or access to another binary provider (where you can trade identical products). This is because once you are in a position, the BS may quote you away from mkt if they know your position - i.e. if they think they can tell which way you are next going to trade, they will adjust their quotes accordingly.

1.

Calculate the delta of the option you are looking at - either dailies or weeklies, don't bother with anything else.

2.

Wait until the option price quoted by the BS is away from your calculated price (the delta). There are several reasons this may happen

i - the BS provider isn't hedging his delta in spot, and it getting too exposed to one side of the trade - he changes his quote to entice orders to come on on his left hand dide / right hand side, whichever he wants.

ii - the BS is hedging his delta, but needs to hedge his gamma. He can't do this in spot because the gamma of spot is obviously 0.

3.

Trade the option when the BS is quoting the option away from it's theoretical value and either:

i - trade the other side of an identical option with another provider
ii - trade the other side of the option with the same provider if the prices are different
iii - hold until expiry

this is not arbitrage

because there are still risks associated with the trades, both systemic and specific. The reason this could work is because the BS has finite risk limits, and at some point may need to reduce his exposure. Under these circumstances, the BS may well quote options either rich or poor to entice order flow where he needs it. The trick is to know when this is, by understanding the "fair" price of the option he is quoting.
 

pboyles

Legendary member
8,072 1,302
you will need 2 accounts with the bucket shop or access to another binary provider (where you can trade identical products). This is because once you are in a position, the BS may quote you away from mkt if they know your position - i.e. if they think they can tell which way you are next going to trade, they will adjust their quotes accordingly.

1.

Calculate the delta of the option you are looking at - either dailies or weeklies, don't bother with anything else.

2.

Wait until the option price quoted by the BS is away from your calculated price (the delta). There are several reasons this may happen

i - the BS provider isn't hedging his delta in spot, and it getting too exposed to one side of the trade - he changes his quote to entice orders to come on on his left hand dide / right hand side, whichever he wants.

ii - the BS is hedging his delta, but needs to hedge his gamma. He can't do this in spot because the gamma of spot is obviously 0.

3.

Trade the option when the BS is quoting the option away from it's theoretical value and either:

i - trade the other side of an identical option with another provider
ii - trade the other side of the option with the same provider if the prices are different
iii - hold until expiry

this is not arbitrage

because there are still risks associated with the trades, both systemic and specific. The reason this could work is because the BS has finite risk limits, and at some point may need to reduce his exposure. Under these circumstances, the BS may well quote options either rich or poor to entice order flow where he needs it. The trick is to know when this is, by understanding the "fair" price of the option he is quoting.

...and take all your profits before you hit $100k because that's the point they'll go bust and disappear.
 
 
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