By Darrell Martin
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.
Is it gambling if a trader holds an option to expiration? What about the trader who consistently holds a binary contract until expiration? There are times when it may be justified such as when an exit order is not filled before expiration. Nevertheless, the fact is traders 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 the last five dollars of profit.
If you are going to trade binary options, then you should trade them, not bet them. When trading Nadex, which is regulated by the CFTC (Commodity Futures Trading Commission), you have the choice to close the binary option before expiration. In addition, you have the ability to set a limit order to take profit. 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. When you open a new position, you may 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 the 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.
For example, if you sold a contract on the AUD/USD at $70, you could set the limit take profit order to exit the position at $40 giving the trader a 1:1 risk/reward ratio. You risked $30 to enter the trade and by placing a limit take profit order to exit at $40, your profit potential is $30. This would be a 100 percent return on risk and investment. It is increasing the probability of being profitable, since the trader is not gambling or waiting until expiration. - Simply hit submit. The limit order will now go into working orders where 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.