By Darrell Martin
Does the amount of time remaining until expiration have any effect on the price of a binary option? The simple answer is yes, it can. If the underlying market is at the price that matches the binary option’s strike price, then the binary is worth about 50. At that point, it doesn’t matter if there are three minutes, three hours or three days until expiration. This binary would be considered At The Money (ATM), having a delta of 50, regardless of how much time is left until expiration.
The following image shows three different expiration times of binary options for US Small Cap 2000, which has the Mini Russell 2000 for its underlying derivative. You can see the contract that is closest to the underlying market price (highlighted indicative on right) is priced closest to 50. It does not matter if there are 35 minutes, almost 3 hours or 3 days remaining, the ATM strike will always be around 50.
However, if the binary option strike is either above or below the market, time has a significant impact on the price. The binary option price will change more slowly the more time there is until expiration. As it gets closer to expiration time, the binary’s price will change much faster. The binary option price moves closer to 0 or 100 as time moves closer to expiration. Not only does the price of the binary move faster the closer it gets to expiration, but the price will also be less if it is Out of The Money (OTM) or more if it is In The Money (ITM). This is because there is less time premium in the binary option.
The image below shows that with a little over five minutes left until expiration, the OTM binary option price has dropped considerably. You can see how close it is to 0.
With the Indicative Index (highlighted in the upper right corner) at 1180.313, the OTM strike of >1181.5 is 6.25/11.25 for the bid and offer. The ATM strike of >1180.1 remains around 50 at 51.00/57.00. The ITM strike of >1178.7 is 91.50/96.75.
The binary option has to expire at 0 or 100. So the less time there is, the faster is has to move to be at either 0 or 100 at expiration. This is similar to how the delta of an option has to be 0 or 100 at expiration. It is important to note that just like a call or put option, a binary option does not have to be held until expiration. You can exit at any time until expiration.