By Darrell Martin
In an article titled Understanding the Basics of Binary Options, the basics of trading binary options was discussed along with some points regarding choosing the right strike being stressed. This article will build on the first article.
If you are new to trading, your first visit to the Nadex platform might be overwhelming. Tutorials, trainings and webinars, offered by Nadex, walk you systematically through trading binary options and spreads. Once you determine the market you wish to trade, you can pull up listings of the expiration times offered for that market on the platform.
Next, you will see all the contracts listed for that expiry. Each listing has a different price, known at Nadex as the strike price. The following image will help your understanding.
Each listing down the left side under Contract is a binary contract. Notice for each different strike price, there are different prices in the Bid and Offer columns. The Size tells how many contracts are available at that strike price at that moment. Also listed is the Time Left until expiration. The Bid column is the price to Sell the contract and the Offer column is the price to buy the contract. The Nadex Indicative Price determines if the strike price is in the money or out of the money at expiration.
Nadex determines settlement by the Nadex indicative index. It is not some random chart or data feed. To determine the indicative, Nadex takes the last 25 orders, takes off the highest five and the lowest five, and then averages the middle 15. This protects you from crazy spikes or a huge block order right at the end of trading.
There are benefits to trading Nadex binaries. There are no stop outs. You have limited defined risk known before entering a trade. Trading Nadex binaries prevents problems with market whipsaws. (A whipsaw is when the market jumps up and down very quickly.) You can’t lose more than the defined risk. Risk is the amount put up to enter the trade. You can trade one or 100 contracts, depending on what is available, the size of your account and your risk management.
You may have seen crazy flash crash days, where the market spikes or drops and people lose a ton of money, sometimes more than they had in their accounts. That can never happen with a Nadex binary or spread, with its capped risk, known before entry of the trade. The market could fly against you, but you would not lose more than the upfront, defined risk. You do not have to worry about big margins or big risks.
Held until expiration or exited before expiration to protect gains or limit losses, is another benefit of trading Nadex binaries. If you exit early, the contract can be worth something different than 0 or 100. It is never worth less than 0 or more than 100.
Trade binary options in volatile or flat markets. They can be traded directionally- long or short. Binaries can straddle the market. Use scalping with small moves and large profits and premium collection in neutral markets. Employ tiered in contracts as another profitable strategy.
The limited risk on binaries, along with the small contract size, makes them an attractive way to trade. A floor of $0 caps the risk of long positions and the profit of short positions. A ceiling of $100 caps the risk of short positions and the profit of long positions. The risk is never more than $100 per lot, although you have the choice to do multiple contracts. Settled at cash value of the option, meaning no delivery of physicals, such as stock certificates, gold or corn, makes trading binary options appealing.