By Darrell Martin
Although Binary transactions were minimally regulated when they first appeared as part of over-the-counter (OTC) transactions in the early 1970s, much of the controversy is removed when traded through a CFTC regulated US based exchange like Nadex.
What Is A Binary Option? Similar to a regular option contract, a binary option is a limited risk contract based on a simple yes/no market proposition, such as will the price of the markets go down by the end of the trading day. At expiration, a binary option, being an all or nothing condition is worth either zero or one-hundred. However, when trading Nadex Binary Options, you are not locked into the trade. You can enter and exit at any time until expiration as long as there is someone to take your position. This enables you to protect your profits and cut your losses.
How Does A Binary Option Work? Binary options are based on a simple yes/no proposition allowing you to trade the financial markets. Their pricing is, in simplistic terms, based on the probability of a certain event happening. In addition, binary options have a third alternative: you do not have to hold to expiration. You can close the contract before expiration to lock in profits or to help diminish loss, as the probability of the event increases or decreases with changes in time, pending news, and the price of the underlying market. A great benefit is that binaries offer limited trade risk, with your max risk and your max reward completely known before you place each trade. Binaries can be traded whether the market is in an uptrend, downtrend or flat, for those who like to collect premium. They can be traded on short-term intraday frames or even weekly time frames. There are over 2,400 daily contracts on some of the most popular financial markets.
As an example, suppose there are reports being released in the early morning hours (ET) from Great Britain, which could have an effect on GBP/USD. You decide from your analysis that the GBP/USD could be above 1.4920 at expiration or at least move in that direction before expiration. You buy GBP/USD >1.4920 (7AM) for 53.75. GBP/USD is the underlying market. 1.4920 is the strike price. 7 AM is the expiration time. If you buy, you are saying that the underlying market, GBP/USD will be greater than (>) the strike price of 1.4920 by the expiration time of 7 AM ET. If you sell, you are saying the underlying market, GBP/USD, will be equal to or less than the strike price of 1.4920 by the expiration time of 7 AM ET.
You can choose as many contracts as you like with each contract being worth a maximum value of $100. If the market moves in your favor, you can close it early. Conversely, if you hold the contract until expiration, since you bought it, and the market expires greater than 1.4920, then your trade would receive the initial risk capital of $53.75 and the maximum profit of 46.25, less fees. When you look at the image below, you can see that the maximum profit and loss are shown before you ever place the trade.
What Is Nadex? Nadex stands for the North American Derivatives Exchange and is based in Chicago, IL. The home page at www.nadex.com says Nadex is a Designated Contract Market and Derivatives Clearing Organization, subject to regulatory oversight by the Commodity Futures Trading Commission (CFTC). Member funds are held in segregated bank accounts within the U.S. When trading on Nadex, there is full transparency and because you are trading directly on the exchange, there is no need for a broker.
What Are The Pros Of Binary Option Trading? Some of the advantages to trading binary options are limited risk, low collateral and short-term contracts. With limited risk, the maximum amount you can lose on any trade is your original investment. There is no margin requirement and never a margin call. Because binary contracts are priced between zero and $100, this is a low amount of collateral required. Binaries have contracts ranging from 5-minutes to one week, which is short term trading.
Tim McDermott, General Counsel and Chief Executive Officer of Nadex, explaining another major advantage to trading binary options is the accessibility and flexibility of trading. “Binary options on Nadex are very accessible to the retail trader, who can open a Nadex account in as little as 10 minutes online and with as little as $100 deposited into the account,” McDermott told Benzinga. “Traditional option accounts are much more difficult to open and typically require deposits of $10,000 or more.”
What Are The Cons Of Binary Option Trading? A new trader may come into trading binary options and since the risk seems low, may decide that education/training on how to trade binary options is not worth his or her time. Trading binary options is a simple concept, but it is like anything else of value. You must invest time into learning the best strategies and when they can best be used. Risk management must also be incorporated into any type of trading.
Is Binary Option Trading Safe? When traded through a CFTC (Commodity Futures Trading Commission) regulated exchange such as Nadex, binary option trading is safe. Nadex offers full transparency on every trade. They are not trading against you. In fact, the only money they make is on the nominal fees charged when you place a trade through the exchange. The fee for each trade is only $0.90 for the first nine contracts. Once you place 10 or more contracts, the fees are capped at $9.00. Member funds are held in segregated bank accounts within the U.S.
Check Before Trading With Other Brokerages The CFTC is designed to protect traders from fraud. A list is maintained on their website where you can check any potential brokers or exchanges to ascertain their status. The website is found at sirt.cftc.gov.
Trading Binary Options At Nadex Is Directed To The Retail Trader Nadex is a regulated exchange in the U.S. where you can become a member and trade directly on the exchange as a retail participant. Nadex provides retail traders direct access to contracts based on a range of global markets. An exchange, such as Nadex, must remain completely neutral with the respect to the activity that takes place on it. Nadex does not take positions on the markets not do they serve as counterparties to any trades.
Trading binary options can be a lucrative choice for short term trading. However, it should only be entered into after careful study and demo trading. To learn strategies to use when trading binary options, visit www.apexinvesting.com where all education is free. You can open a demo and/or a live account at www.nadex.com. Nadex can be traded from 48 different countries.