By Darrell Martin
If you have traded options before you are familiar with the terms In The Money (ITM) and Out of The Money (OTM.) Binary option trading is unique in the fact that the terms ITM and OTM depend on whether you are long or short.
Most binary brokers only offer ITM binary options. Nadex directly accepts retail traders as members and offers both ITM and OTM binary options. Binaries on Nadex can be closed before expiration. However, if held until expiration, they must be ITM to be profitable.
The following image can help you understand the difference between OTM and ITM when buying.
When buying OTM, the statement is false as you are saying the market will be lower than or equal to the strike at expiration. A couple of examples are shown above. If the market is currently at 2048.0, then both of the contracts at 2051 and 2048 would be OTM and false statements. With the 2051 strike, the market is lower than the strike. The 2048 contract is equal to the market.
For the statement to be true, the market must be greater than the strike. Therefore, the contract listed at the bottom of the image, the ITM buy, would be true because 2048 is greater than the strike price of 2045.
Now let’s look at ITM and OTM Selling.
When you sell an ITM binary, you are saying the statement is false because you think the market will be lower than or equal to the strike price at expiration. In the first example, 2048 is lower than 2051 making the statement false. The second example shows the market is equal to the strike, and for the statement to be true, the market must be greater than the strike.
The OTM Sell statement is true because the market is 2048 at expiration, which is greater than the strike price of 2045.
OTM binary options have an excellent risk to reward ratio. You can use them for straddles, such as when you think there is going to be a big move from a news event. Use them for medium or short-term trades and even swing trades.
ITM binary options usually have a risk of $50 or more and as long as they stay ITM, they will be a profitable trade.