This was Darrell’s Reply…
A binary is a delta of a call option. Therefore, butterfly setups trading Nadex binaries won’t work the same as trading regular options, but spreads will. To exit at $5 when shorting $95 when long, is a great rule, you also need to look at the binary ladder to see optimal take profit exit prices. i.e. …difference in price between different strikes, do you get more value or time with the lower or upper strike or 2 hour vs 1 hour binaries.
Probabilities are based on IV (implied volatility) and based on expiring, not on the underlying market touching the strike. The market may touch and go above, below, the strike etc., but probability is in relation to expiration time and thus referring to expiration time, with Nadex binaries. And, it’s not exactly either, because it’s a delta probability.
We have a few Nadex options article series and have done 2 webinars on them High IMPLIED volatility pushes price close to the center being 50 on a binary as the probability becomes closer to 50/50. As our videos and articles state binaries are deltas, so they don’t really have a theta. Iif looked at as a probability, delta that number will approach 0 or 100 faster the closer entry is to expiration depending on if the entry was ITM or OTM. Vega is very very very much a part of binary options, as it has a large impact on gamma, which has a large impact on delta if IV is high. If IV is low you will see little Vega gamma impact. As I tell all traders, focus on spreads they act like a vertical option. Like very wide verticals, in fact, if you compare a spread on US 500 to a call on ES, on say Thursday night to Friday morning, they will move the same, note the 5 to 1 ratio.
Also, note ES will list in risk, where as Nadex will list in risk plus price.
You’re trading a Greek delta when you trade a binary…the call of a Friday expiration on ES, the delta will match the binary with the same strike give a few ticks for bid offer spread and IV variances.
Below are a few videos that go over Greeks for binaries and for spreads.
In addition to the videos there is an article series covering the subject.
Simplifying the Greeks On Binaries: Intro to a Series
Simplifying The Greeks On Binaries: Delta and Gamma
