By Darrell Martin
Whether you have been trading binary options with Nadex for a while, or are just getting started, there are several benefits to think about. There are no stop outs, no whipsaws and you cannot lose more than the defined risk, which is limited and known before you ever enter the trade. The risk is the amount put up to enter the trade. You can do one contract or hundreds. There is no extra margin and never a margin call. Everything is known upfront.
When you are trading binary options, keep in mind that they are short term, fast moving contracts with only two possible expiration/settlement values: 0 or 100. A binary is a true/false statement and at expiration, the event happened or it did not. Another benefit of trading with Nadex is the opportunity to exit before expiration. If the outcome of the binary is in question, in order to cut losses or protect profits, you can exit before expiration.
Binaries can be traded in volatile, trending or flat markets. Even if the market is not volatile, it allows you to leverage the volatility of the Nadex binary itself, for potential high percentage capped returns on small investments, or potential high probability capped returns on moderate investments, in short-time frames without having uncapped risk like many traditional markets.
There is limited risk on binaries. The floor of $0 caps the risk of long positions and the profit of short positions. The ceiling of $100 caps the risk of short positions and the profit of long positions. Binaries offer small contract sizes. Traders never risk more than $100 per lot. However, multiple lots can be traded.
Since binaries are settled at cash value of the option, there is no delivery of physicals. You will not have to worry about taking delivery of barrels of oil, ounces of gold or silver, or stock certificates.
When considering which strike is best for the strategy you are trading, be sure to look at the midpoint for the probability of the binary expiring above the strike. Let’s look at an example to understand better how this works.
Suppose the EUR/USD is currently trading at 1.11654 and you decide to buy EUR/USD >1.1161 3PM for $77.50. Your maximum risk is $77.50; your maximum reward is $22.50. You can sell for $72.25. Midpoint or mid-price is $74.87. Find this by adding the bid and offer prices together and then dividing by two. The midpoint shows the probability of that strike price, at that second in time, expiring above the strike. In this example, it has a $74.87 percent chance the binary will expire above the strike.
Let’s look at the same strike price, but assume you want to sell it for $70.75. This time your maximum risk would be $29.25 and a maximum reward of $70.75. You can buy for $76.25, which makes your midpoint $73.50. At this second in time, price point indicates a 73.50 percent chance the binary will expire above the strike. This puts the probability in favor of buying, not selling this contract.
Binaries have different durations and expirations, from five-minutes to weekly contracts. They offer amazing benefits for all markets offering the chance to collect profits using various strategies depending on whether the market is directional, flat or volatile.