By Darrell Martin
Perhaps you have a basic understanding of binary options and you have a system to use, but you are not having a lot of success. Maybe you are not following the rules of your system or not truly understanding your system. What if you are? Maybe you need help choosing the right binary. That may be the one key element you are missing. Once you have a handle on choosing the right binary, it could make a huge difference in your success in trading.
It is imperative that you understand how At The Money (ATM), Out Of The Money (OTM) and In The Money (ITM) priced binary options affect the strikes you choose when trading. When you look at all of the strike prices for any given market available on Nadex, it may be hard to choose one that will bring the results you want. The image shown below will help you understand what is meant by ATM, OTM and ITM binary options.
A binary is only a statement where you decide if it will be true or false at expiration. If it is true, you buy based on the prices on the right hand side of the list. If false, you sell based on the prices on the left.
The Nadex Indicative Index determines settlement and the binary is worth either $0 or $100 when it expires. Because of this valuation, an ATM binary is one that is priced about $50 because that is where the market is trading at the moment, no matter how much time until expiration. For an ATM binary to be profitable at expiration, there must be movement to make sure it expires as a true statement. The probability of an ATM binary is 50 percent.
In order to profit, OTM binaries have to have movement. You can look at the price of an OTM binary, average the difference between the bid and the offer and get the probability of the particular strike expiring profitable. Consider the EUR/USD >1.0853 strike from the chart above. The bid is 12.25 and the offer is 17.25. The average is about 15 giving you a 15 percent probability of the statement being true at expiration. When you pull up a ticket for that option, you may like that you are only risking $12 to make $88, but the probability is not there. You will lose a lot more than you win if you choose this binary option. There are times when you would trade this type of option, but you have to have a reason.
When the statement is already true, you have an ITM binary option. There is no movement necessary for it to remain profitable. If the market remains flat, moves slightly against you, or continues in the direction (bought or sold) of your binary, as long as your statement remains true, you profit. Only when the market moves against you a lot, you lose.
If you are choosing the wrong binary, it does not matter how great a system you have. Choose the right one for what you are trying to accomplish in your trading.