By Darrell Martin
When trading binary options, you may have noticed how the price can change over time as the market moves up and down. Time affects price. The price will change as time expires even though the market may be in the same place on the chart.
The following image may help you visualize how the price can change over time.
In this EUR/USD example, the strike was 1.2450 with a 3:00 PM expiration. With more time until expiration, the price was at 54/58. The first price listed is the offer or sell price. The second price in the pair is the bid or buy price. You can see that the market dropped and the price followed going down to 42/46. Then, it channels slightly for a time, and the level on the chart is actually a little higher than it previously was, but the bid/offer price has dropped to 34/38. Another move on the chart and some passage of time brings the level only higher than the beginning of the analysis, but the price is now 72/76. With a drop on the chart and getting closer to expiration, even though the level isn’t as low as before, the bid/offer price is only at 22/26. A movement up above the strike and time on this contract expires making it an in the money trade. The statement was true. If you sold this contract, it would expire at zero. If you bought, it expired at 100.
The next two images illustrate what can happen to the bid offer price when it stays below (fig.1) or above (fig.2) the strike price as time gets closer to expiration.
(fig.1)
Notice how the level on the chart is similar at 42/46 and 18/22, but time has almost expired.
(fig.2)
The levels of the market actually drop as time progressed, but remained above the strike price. Hence, the bid/offer price increased.
This last image shows how you can have multiple opportunities to enter and exit trades in a very short time period- only 15 minutes! This was a small flat market with some volatility where you could take advantage of trading binaries.
As there is less time to expiration, the binary is more volatile causing the price to change. Movement has an effect on the price, as does the proximity to expiration, which makes binaries great instruments for trading in both trending and flat markets. You can get a lot of volatility in the binary markets despite a lack of volatility in the underlying market.