By Darrell Martin
Whenever you log into any trading webinar or website, you see the disclaimers informing you of the risks associated with trading. As traders, the element of risk is known; however, it can come in many forms. A volatile market has a different type of risk than a flat, channeling market. If you are trading with a margined account, there is a different risk than with a cash account.
When you trade binary options at Nadex, you are trading with limited risk. This means you cannot lose more than a predefined dollar amount. If your risk is limited when trading, you don’t have to worry as much when the market is not going your way.
With binary options, the initial trade cost, to either buy or sell, is the maximum trade risk on the position. You always know the max risk up front. The binary is always priced between zero and 100. If you are buying, you want the contract to expire at 100. If selling, you want the contract to expire at zero. At expiration, only one party gets the settlement payout of $100 at expiration. It is all or nothing.
If you are buying and the price was $60 per contract that is your max risk. The buyer’s risk is to the downside to zero. Your max profit would be $40 per contract. For the same amount of risk when selling, your cost would be $40 per contract, but your risk is to the upside to 100 giving you a max risk of $60. Your max profit would be $40. When you look at how these combine together, the binary costs for both the buyer and the seller will equal the $100 expiration payout.
The reduction in your stress comes with knowing that your risk is known up front and you cannot lose more than that amount. You will never have a margin call. You are not locked into the contract until expiration should the market move against your position. You can exit at any time provided there is an opposing position available. By trading binary options, stress levels may be reduced as risk is known, limited and/or lowered.