Binary Options: Price at Expiration

Video Transcript:

We are going to take a look at the volatility that can be seen when the underlying market is trading at, or very near, the strike price of a Binary Option as it approaches expiration. When the underlying market, whether it is an equity index, a commodity or a currency, is around the Binary Option strike price near expiration, extreme price swings can take place. The reason being, the difference between a settlement of zero and 100 can be as little as 0.1 tick. A small change in the value of the underlying can cause exponential movement in the price of a Binary Option.

Let’s have a look at an example. This chart represents 15 minutes in time, so a very short timeframe, and very little movement – the total up and down is about 20 pips in GBP/USD. We see a bid/offer of 32/36 with about 15 minutes to go until expiration. The price moves up, in this case only about six to seven pips, in about a minute and a half. Not a big movement.

However, the price of the Binary Option went from 32/26 bid/offer to 68/72. As it moves back down below the line, it goes from 68/72 to 20/24. It then moves back up to the strike, and is now priced at 48/52, so we are already seeing some very dramatic movements in the price of the Binary Option with very little movement in the underlying market. It moves back to 19/23 and then the price shoots up, and I say shoots up but really it’s only about 14 pips, not a big movement in the underlying and that took place in about two-and-a-half minutes.

However, while it was only about 14 pips in the underlying market, the price of the binary went from 19/23 to 94/99. This creates opportunity as well as risk. The price of the binary is based on probability, and in such a compact timeframe, the probability is shifting dramatically with each tick.

We move from 94/99 to 84/88 in another minute, and just about a minute to two minutes later the binary moves to where it settles at zero. We can see there is opportunity here but we also want to be aware of the risks involved. This was just a brief example of how the price swings towards expiration can be quite dramatic.

For questions or additional information please give us a call at (877) 776 2339 or send us an email at customerservice@nadex.com.