Lets suppose that I buy a US 500 binary at 1823 for $10.00. The price of the binary drops to 1823 and I want to sell before expiration. How do I calculate my max loss.
Ok so
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You bought at 1823 binary for $10 If you where able to buy a binary for $10 then that means the price was under 1823 A buy means that you assume the market will risk will be > the strike bought When you buy the price you buy for is the risk so if you bought for $10 the risk is $10
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The price of the binary drops to 1823 and I want to sell before expiration. To drop down to 1823 - it would have to first rise up to a level higher than 1823 - so it rose past 1823 then came back down to 1823 If a the underlying market that the binary follows is at the binaries strike - ie ES is at 1823 and the strike is 1823 then the binary whether there is 5 minutes, 5 hours of 5 days until expiration - will be worth approx $50 (little bid ask spread say 47/53 bid/ask. Why because if the market is at the strike there is a 50/50 chance it will still be there.
Therefore if you bought at 1823 for $10 - and the price of the ES was at 1823 then you would be able to exit it for approximately $47 (bid side/sell side) making a $37 profit.
To go more advanced there are 2 choices: 1) use our binary scanner - simulator settings
The other choice is to use a simple black scholes model formula that will accurately calculate delta on a call of the same strike and same expiration time - as in essence delta of a call option and the price of a binary are going to be the same.inputting your variables fo deltas change do to a change in time ie instead of 90 minutes you have 20 minutes left and the underlying is at this price what would be the delta of the call option then - that is the price of your binary.
