By Darrell Martin
Scenario:
The current indicative price for Gold binary options is 1074.600. You decide to sell the >1076.0 3PM contract at 23, which puts your risk on the trade at $77. There are still two hours until expiration. When you look at the Profit/Loss (P/L) portion of your open positions, you are losing $7.00.
You are correct in your analysis of the current market because at this moment, the indicative is definitely below your contract price, so why does the P/L show a loss? If you were to exit the trade right now, you would exit with a loss, which will be explained.
Messes with your head until you understand
It kind of messes with your head until you understand what is happening. The bid and ask price can never be the same; there will always be at least a penny difference. Because of this difference, you will always have a profit or loss. The price movement can make that difference more or less.
In the image below, notice the difference in the bid and ask prices.
If you bought at the offer of 25.75, with no movement, and you wanted to sell immediately, you would incur a loss of 9.25. If you sold at the offer of 16.50, you are expecting to exit at a lower price and so getting out at 25.75 would also cause you to have a loss of 9.25, not including fees.
What about movement?
To clarify further, let’s go back to the scenario. If there was no price movement and you were to exit the trade immediately, you would lose the difference in the bid and the ask prices, which in the GBP/USD binary example was $9.25. If you sold at 23 and the current market buy price was 30, as in the Gold binary scenario, you would lose $7. With movement, the numbers would change.
Expiration
With two hours until expiration, there is plenty of time for the market to move. Until expiration, you will not receive the full settlement. Remember, when trading binary options, it is an all or nothing settlement. If the binary option contract settles in the money, you will receive the difference between your risk amount and $100 and you get your risk back. If the binary does not settle in the money, you get nothing, losing whatever you risked to get into the trade.
Exit any time
Part of the beauty of trading binary options on Nadex is being able to enter and exit at any time. You are not locked into a contract. If you see that the trade is moving against you, go ahead and exit to cut your losses or protect your profits.
Conclusion
Understanding why P/L is showing an immediate loss can be a tricky part of trading to wrap your head around when you first start trading. Once you know how it works, it makes sense and you will probably be anxious to help the next new trader learn about P/L when they question why their trade is showing an immediate loss.