Volume Versus Market Cap

Watch the Momentum on This Stock

Both volume and market cap are strong fundamental numbers that will help you to gain a better idea about the movement that a stock shows. As a binary options trader, these concepts will give you a better idea of the strength and momentum behind a particular stock as you start thinking about opening up either call or put options in relation to it. There are a few striking examples that have occurred in the last week or so that can give us a clear example of how this information impacts our ability to make profitable trades.

The first big example here is the Alibaba Group. Alibaba has a market cap of 260.23 billion, and saw an increase in price of 7.05 percent on Friday, August 12th. Much of this movement was because the company had recently been given a higher, revised price target for the next 12 months. However, this big jump in price was more of a feather in the hat of the large amount of gains that the company had already experienced over the last 30 days.

Alibaba has a large market cap, but the big gain was made possible because of a larger volume in shares exchanged over the course of the day. On Thursday and Friday (the 11th and 12th), the company saw a huge increase in volume. In the first 30 minutes of the trading day on Thursday, there was a volume of 14.43 million, while on Friday, that number was only slightly lower at 13.82. Those are huge numbers, particularly for a company that doesn’t see that much volume over the course of a single day sometimes. This kind of information might not seem like it’s that helpful for a binary options trader once you consider the fact that the vast majority of brokers out there do not allow you to trade stocks during the first 30 to 60 minutes of the U.S. trading day. However, the first 30 minutes of the day is typically what sets the tone for the entire day, unless something unexpected happens afterward. For example, between 11:30 and noon on Friday, Alibaba saw a volume of 7.31 million. If you look at the previous month beforehand and break it up into 30 minute segments, this timeslot was the third highest that the company had seen—with Thursday and Friday from 9:30 to 10:00 being the only two other timeframes that saw a higher volume. During high volume periods like this, when the trend is very obvious, the predictability of price movement is much better than it is at any other point in time, making binary options the best tool for trading at these point, especially for smaller accounts.

The important thing to consider is that trading volume needs to be looked at in terms of overall market cap. With Alibaba, the average volume that this company sees per day is 14.43 million. On Friday, the volume stood at 71.97 million. The larger than normal gains were magnified because of the larger than normal trading volume propelling them. For a company of half the size of Alibaba, we would never expect to see numbers like this, if we did, the gains (or losses) would be likely to be even larger. For this reason, we need to be sure that the volume is compared to market cap to give us a good idea of not just the direction of the trend, but the magnitude and strength of that trend, too.

This concept can be used for any stock through your binary broker; Alibaba just stands out as a good, recent example.