By Darrell Martin
There are defining points in your life that can help determine the person you become.
Some of these are winning moments, some are losing moments. In trading options, however, the defining point is the settlement.
The settlement in a trade is the value or the price, at expiration, of whatever market you are trading.
The Nadex Glossary defines it this way: “Settlement value is the level at which a contract is settled, based on the expiration value and any relevant parameters of the contract (e.g. Floor/Ceiling levels for Bull Spreads). Binary Options must have a settlement value of either 0 or 100.”
When you are in an option trade, you are answering the yes or no question regarding whether or not the instrument will settle at a given price. Your settlement is either going to be 0 or 100, depending on whether your answer to the yes or no question was wrong or right. When trading with Nadex, you can always exit the trade at any time prior to expiration.
In order to determine the settlement value, Nadex bases it on the expiration value. This is not just a randomly selected number. There are math calculations involved in reaching this defining value. Again, the Nadex glossary gives us the best definition. It says: “Expiration value is the calculated level of the underlying market at expiration, as determined by Nadex (except for economic events where it is determined by the relevant source agency)."
Nadex uses the following process to calculate expiration value:
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Take the last 25 trade or midpoint prices in the underlying market. (Midpoints apply to forex; last trades apply to other contracts.)
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Remove the highest five prices and the lowest five prices.
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Take the arithmetic average of the remaining 15 prices and round to one decimal point past the point of precision of the underlying market (with the exception of Wall Street 30, which is rounded to the same point as the underlying market).
On forex, Nadex takes the last 25 non-sequential mid-quotes and then averages the middle 15.
Why do they use mid-quotes? This is much better for the trader and a fairer way to do settlement. The bid/ask on forex can vary so widely that using the last quotes would cause the price to jump too much.
We will cover more details in the next article on Binary Settlement.
To learn more about how to trade binary options in-depth and for binary options signals, trading strategies, tools and trade rooms see ApexInvesting.com.
This article was originally published on Benzinga.com in July 2014.
