How to Trade Binary Options

Binary Options express simple yes/no propositions. If the condition described in the option occurs, then the option settles at 100; and if it doesn't, then the option settles at 0.

Yes or no?

Binary Options describe specific events in the financial markets, for example: Gold to be above $950 at 1:30pm today.

  • If you thought that: Yes, Gold will be above $950 at 1:30pm, then you would buy the option
  • If you thought that: No, Gold won't be above $950 at 1:30pm, then you would sell the option

They are settled by reference to a specific underlying market. The underlying market for our Gold Binary Options, for example, is COMEX/NYMEX* Gold Futures.

0 or 100

When a contract expires, Nadex calculates an Expiration Value based on the underlying market prices. The Expiration Value is then used to settle the contract.

If the specified condition has been achieved, then the contract is settled at 100; and if it hasn't then the contract is settled at 0. Following from the example above:

  • If the Expiration Value for Gold was above $950, then the contract would be settled at 100
  • If the Expiration Value for Gold was $950 or less (that is, not above $950), then the contract would settle at 0

Please see the Contract Specifications for full details of expiry and settlement.

Contract size: $1 per point

The contract size for a Nadex Binary Option is always $100. This means that each 1-point movement in the price of the contract is worth a $1 profit/loss per contract.

So if you bought 7 contracts which expired for a 14-point gain, your profit would be 7 x 14 x $1 = $98. Likewise, if you sold 12 contracts and later bought them for a 9-point loss, your result would be a loss of 12 x 9 x $1 = $108.

Limited Risk

Because a Binary Option can only be settled at 0 or 100, your maximum risk on a trade is always known in advance.

If you bought at 56, then your maximum loss would occur when the contract settled at 0; representing a maximum risk of $56 per contract. On the other hand, if you sold at 66 your maximum loss would occur when the contract settled at 100; a maximum risk of $34 per contract.

The unique structure of Binary Options ensures that the most you can lose is always known when you open a trade and you can never be called upon for extra funds or margin.

Trade in and out

When you open a position in a Nadex contract, you do not have to hold it until expiry. You can log into the platform and enter an order to close, or partially close, your position at any time until expiry.

 

*NYMEX is a registered service mark of the New York Mercantile Exchange, Inc. COMEX is a registered service mark of the Commodity Exchange, Inc. Nadex, Inc. is not affiliated with the New York Mercantile Exchange, Inc. or the Commodity Exchange, Inc. and neither the New York Mercantile Exchange, the Commodity Exchange, Inc., nor their affiliates, sponsor or endorse Nadex, Inc. or its products in any way.