What does in-the-money mean?
In-the-money, at-the-money, and out-of-the-money are terms describing the relationship between an option or binary option and the underlying market that it’s based on. For Nadex Binary Options, these terms specifically refer to the indicative price, and whether it's at, above or below the strike price. If the Nadex indicative price is above the strike price of the binary option, it is said to be 'in-the-money'. If this price stays above the strike price, the binary will have the full value of $100 at expiration. This means the buyer of a binary option wants the market to be in-the-money.
In, at, and out-of-the money
The buyer of a binary option that expires in-the-money will receive a $100 payout and the seller will receive zero. Binary options based on stock indices, forex and commodities markets pose the question:
Will this market be above this strike price at expiration?
Buyers expect the answer to be yes and sellers expect the answer to be no. In other words:
If you buy a binary (or any) option based on stock indices, forex, or commodities markets, you want the Nadex indicative price to be above the strike price at expiration. In other words, you want it to be in-the-money.
If you sell a binary (or any) option based on stock indices, forex, or commodities markets, you want the indicative price to be at or below the strike price at expiration. In other words, you want it to be at-the-money or out-of-the-money.
Nadex events contracts that expire at-the-money will receive the $100, as well as events contracts that expire in-the-money.
Extrinsic and intrinsic value
During the life of the contract, prior to expiration, a binary option will usually be cheaper to buy when it is further out-of-the-money.
Before expiration, an option has extrinsic value, which reflects how likely it is to expire in-the-money. In-the-money options also have intrinsic value, because the market is already above the strike price.
An in-the-money option will typically have a higher purchase price than at- or out-of-the-money options, because it has intrinsic value - the market is already above its strike price. If it remains in-the-money at expiration, the option will get the full $100 payout.
Possible advantages to buyers and sellers
A trader may choose to sell an in-the-money binary option if they believe the market will go down and the binary will end up out-of-the-money and expire at zero. That outcome would let the seller receive the full $100 payout.
For buyers, in-the-money binary options may offer higher probability (at the time of purchase) of expiring in-the-money, since the market is already above the strike price. In exchange for that edge, the buyer will typically have to pay more to buy the binary. That means a higher initial risk in exchange for the probability advantage.
Traders don’t need to wait for expiration. If you buy or sell at one price and the option’s value moves in your favor, you can exit before expiration to take profit.
Exiting trades before expiration
If you exit a trade prior to expiration, you will receive the current bid or offer value of the contract.
If you bought the binary, you will sell at the bid to exit.
If you sold to enter the trade, your exit order will be a buy at the current offer.
This is true whether an option is at-, in-, or out-of-the-money. For example, you could buy an out-of-the money binary and sell it for a higher price while it is still out-of-the-money. Or you could sell an in-the-money option and exit as the market drops to just around the strike price. Your profit or loss is always the difference between the amount you paid to enter and the amount you receive upon exit, less trading fees.