by Darrell Martin
One new trader complained that even after placing several binary trades on the demo account and double-checking the underlying indicative with a different source, he still managed to lose on trades he thought should be In The Money (ITM). This trader felt he was being taken advantage of and cheated. He did not understand that he was not trading against a brokerage. No one on the other side of his trade cared if he was winning or losing. The exchange’s purpose is to match up buyers and sellers.
If you think about it, to take advantage of a new trader in a demo account would be the worst idea on the planet! A new trader is trading in demo in order to learn. It would not profit an exchange at all to have a trader lose because he is not using real money.
The real issue here seems to be understanding how binary options settle.
Fairness In Settlement
Is it just a random number that determines whether your trade wins or loses? At settlement, a binary option is worth either 0 or 100 depending on the expiration value and if the terms of the condition of the contract are achieved. Choosing a random number would not be a fair settlement, nor would having the last number traded be a fair way to settle as big traders or market makers could push the market in their favored direction.
Expiration Value
The expiration value at settlement must be based on the specified underlying market and follow an outlined process. When trading Nadex binary options in Indices and Commodities, the expiration values are determined by taking the last 25 trade prices in the underlying markets, removing the highest and lowest five prices and then averaging the middle 15 prices. The number is then rounded to one decimal point past the point of precision of the underlying market, except for Wall Street 30, which is rounded to the same point as the underlying market.
When trading Forex binary options on Nadex, the last 10 midpoint prices in the underlying market are taken and the highest and lowest three prices are removed. The remaining four prices are then averaged and rounded to one decimal point past the point of precision of the underlying market. Reuters is used for the market prices, unless it is unavailable, then Bloomberg or another data provider would be used.
Economic Events and Bitcoin
For economic events, the expiration value is the figure released by the designated reporting body. For Bitcoin contracts, expiration value is the last tick before expiration of the Tera Bitcoin Price Index.
The way binary options settle is important to understand when trading and the expiration value plays a big part in whether you win or lose.