By Darrell Martin
A binary option is a statement. It simply says that at a certain time, something will happen or it will not. If you agree with the statement, you buy. If you disagree, you sell. Let’s look at this ticket for example.
The statement on this ticket is underlined and found at the top. It says that the US Tech 100 will be above 4920 at 4:15 PM ET on January 5, 2017. After consulting your E-mini Nasdaq futures chart, if you agree with the statement, you could buy the contract. If it does not look as if this statement would be true at 4:15 PM ET, then you could sell the contract. It is a simple yes or no, true or false statement.
At expiration, the binary contract is either worth 0 or 100. Nadex offers many binary strikes from which to choose for each market and expiration time. That is where it can get tricky, especially if you are new to trading.
Perhaps you have an amazing strategy or system that tells you the market is going to go up. You go ahead and buy a contract, but you end up losing money. The binary expires out of the money and you start ranting to anyone who will listen that binaries don’t work! Is it that or could it be that you are choosing the wrong binary?
This image shows the offered strikes for this market and this expiration alone.
A new trader could be overwhelmed at all of these options. If the strategy says to buy, he or she may quickly grab a low cost binary strike risking only $10-20 with the chance to make $100. The market may move up, but not far enough to reach the strike bought by the trader, so it expires out of the money. The trader then loses and wonders why.
If you are thinking because your chart, strategy or system says the market is going up and you buy ANY binary that you should win, think again. This is not the case. The market must go high enough to reach the strike you bought and make the statement true. If the market closes lower than your strike price, it is out of the money, making the statement false. You chose the wrong binary.
Choosing the strike cannot be based merely on the cost or the risk of the binary. Understand the binary basics and why it’s priced so low. Choose a binary close enough to the underlying indicative with enough time to remain a true statement. Also remember, with Nadex binaries, as long as there is an opposing trader i.e., someone to sell to or buy from, you can exit early to cut your losses or protect your profits.
Futures, options and swaps trading involve risk and may not be appropriate for all investors. Past performance is not necessarily indicative of future results.