What is edge and why is it important? If you have an edge over someone else applying for a job because of your experience, you will probably be the one that secures the position. How can you have an edge when trading binary options?
If you think about it, having an edge is having an advantage. Whenever you enter a binary trade, you always have that possibility or chance that your binary strike will finish in the money but not necessarily the probability in your favor. When binary options are trading at the price of 50, neither the buyer or the seller has any edge. The underlying price is at or near the strike level, so neither has any immediate advantage resulting where their risk or initial costs are equivalent.
Since binary options settle either at 0 or 100 at expiration, having that initial edge can help you achieve the full binary payout at expiration.
When the underlying price is trading above the binary strike level, the binary buyer has an obvious advantage. The greater this differential and the less time there is until expiration, results in the binary pricing pushing toward the maximum level of 100. This can only happen on expiration. The binary buyer has the immediate edge over the binary seller and will pay for the advantage with a higher portion of settlement $100 expiration payout.
When the underlying price is trading below the binary strike level, the binary buyer has an obvious disadvantage. The greater this differential (underlying below strike) and the less time there is until expiration, results in the binary pricing pushing toward the maximum level of zero (0), which can only happen on expiration. The binary buyer has no edge and an immediate disadvantage. Conversely, the binary seller has edge and will pay for the advantage with a higher portion of settlement $100 expiration payout.
When trading binary options on exchange, there is another possibility to get an edge in trading. For each binary strike, there is a two-sided quote with the best bid and best offer price. On exchange traded binary options, you do not always have to take the offer price if you are a binary buyer or the bid price if you are a binary seller. Granted, this is an aggressive approach where you want to have trading exposure immediately, but you can also work limit orders.
With working limit orders, it can allow you to also pick up an additional edge. If you join the bid to buy the binary or join the offer to sell the binary, you have an immediate edge, if your order is executed. The risk is if the order does not get executed and you miss the trading opportunity–but that’s trading.
