By Darrell Martin
With most binary platforms and brokers, you cannot close the binary option before expiration. However, on Nadex, every contract can be closed before expiration.
Many traders are unfamiliar with this choice, and make the mistake of holding a binary option until expiration. A sure sign of a rookie trader on Nadex is one who often holds the contract until expiration. They are greedy and want to get maximum profit. They are overconfident and think they just can’t lose, or they don’t know that it is an option to exit early.
This problem often exists because the definition usually associated with a binary option is that there are one of two possible outcomes: all or nothing. Although at expiration this is true, it does not give the trader the true picture and power of trading a Nadex binary option.
Related: What Is A Nadex Binary Option?
Option traders do not normally hold a vanilla call and put option until expiration. Why? They do not want the option to be exercised if it’s in the money. Another reason may be they want to take the profits and not risk giving all the profits back.
One might say a trader that holds an option to expiration is gambling. The same could be said of a trader who consistently holds a binary contract until expiration. There are times when it may be justified, or maybe an exit order is not filled before expiration. But the fact is, one should not hold any option until expiration without good cause. And even with a good cause, holding to expiration should be the exception, not the rule.
It is hard enough for a trader to pick a market direction, much less to state what price it will be at, and stay at, until a specific point in time. So, make sure to use take profit orders. Don’t let a profitable trade become a losing trade as you wait for that last $5.00 of profit.
If you are going to trade binary options, then you should trade them, not bet them. Nadex, which is regulated by the CFTC (Commodity Futures Trading Commission), gives you the choice to close the binary option previous to expiration. In addition, you have the ability to set a limit order to take profit, so you don’t have to sit around and wait for the price to be hit in order to take profit.
It is very simple to set a take profit order in Nadex:
Open a new position. You may open a position to buy thinking the market will go up, or at least stay up, above your strike price as time passes. You may also open a position to sell, thinking the market will go down or at least stay at or below your strike price as time passes.
Go to your open positions tab in the Nadex platform and simply click the green arrow next to the contract. It will automatically open a contract in the opposing direction with the same quantity.
If you want to close the entire position at a certain price, leave the quantity the same and only one limit order is needed. If you want to tier out of your position on multiple contracts, at various prices, then change the quantity and open enough limit orders to cover each contract.
Change the price to what price you want to exit. Though it seems obvious, make sure to remember that you want to sell higher than you bought when you exit. Likewise if you sold first, you want to buy back lower than you sold when you exit.
As you can see above, in the sold contract on the AUD/USD, it was sold just below $70 and the limit take profit order was set to exit the position at $40 giving the trader a 1:1 risk reward ratio, a 100 percent return on risk and investment. It is increasing the probability of being profitable as the trader is not gambling or waiting until expiration, on the binary to move and stay at or below the binary strike that was sold.
- Then simply hit submit. The limit order will now go into working orders. You will see a confirmation that the order has been received. When the price of the binary is hit, it will automatically exit the position. If the order is filled, you will receive an email confirmation that the order has been filled.
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