By Darrell Martin
It is important to choose the right binary option strike, but equally important to choose the right expiration for your trading system or strategy. Nadex offers several options when it comes to markets and expiration times. These include Stock Index Futures, Spot Forex, Commodity Futures, and Economic Events. Once you choose your instrument, Nadex has various durations and expirations to fit any type of trader.
On four Forex pairs, Nadex offers five-minute expirations 23-hours a day. They have 20-minute expirations on the four US Stock Indices from 10 AM-4PM ET. If you want a little more time to be right, there are Intraday expirations with two-hour contracts that expire every hour within the current trading day. There are also Daily contracts, which expire at the end of the current trading day and Weekly contracts expiring every Friday of the current trading week.
It is paramount that you understand the basics of binary trading. This includes everything from ticks, pips, the strike ladder, pricing, ITM, ATM and OTM. In addition, make sure your strategy and system match the expiration you are choosing.
For example, suppose you consulted a monthly chart of the DOW going back seven years. You could see that the market had gone up over that time, but it would not make sense to buy a five-minute binary contract based on that chart.
A monthly chart does not show what the market is doing right now. On a tick chart or a 5-minute chart, you would be able to see the immediate direction of volume. If you are going to be trading a shorter term, be sure to use a shorter-term chart.
Many times people will choose not only the wrong binary, but also the wrong expiration. Perhaps you have thought the market was going to go up, so you bought a binary only to have it expire worthless 20 minutes later. Then, 30 minutes after that, the market goes right up to where you thought it would go. You were right! It just didn’t happen in the timeframe you chose.
It is important to give yourself enough time to be right, but not so much time that you don’t get the amount of value movement. At expiration, the binary is worth either 0 or 100. As the market moves for you or against you, the value moves closer to 0 or 100. The closer it gets to expiration, the quicker the price has to move to get to a value of 0 or 100. This is about how much time you have until expiration. Remember, the price is always going to move quicker the less time you have.
Price is based on probability. Compare the same 20975 strike on the Dow. One expires in about 20 minutes at 2 PM. The other one is a weekly contract expiring at 4:15 PM in four days. The indicative is the same at 20946.2. However, the probability of the Dow moving 30 points in 20 minutes is less likely than it moving 20 points in four days. Therefore, the same strike can be bought for 4.75 with 20 minutes remaining or for 46.25 with four days remaining.
When looking at the strike ladder, notice the different widths of ticks/pips for binary options expirations. Those expiring in five minutes are very narrow compared to the weekly contracts. Five-minute contracts are a mere two pips wide whereas the weekly contracts are 50 pips. This is because a lot can happen in one week and less movement is expected in the short timeframe of five minutes.
Tips like these can help part-time, nighttime or lunchtime traders. They can be advantageous to strategies where you want to utilize the immediate direction of the market, not the long-term direction. You can take advantage of time, allowing it to work in your favor. Choose the right strike and the right expiration for your strategy or system. In summary, don’t short-term trade long-term binaries or use short-term binaries on a long-term system/strategy.