Binary Options Definition

You may not realize it, but you make binary decisions every day. Simple decisions like, will it rain today? Will the kids eat their Brussel sprouts at dinner? These are binary questions: there can only be two outcomes.

For a binary question, the answer is yes or no, true or false. You either agree with the statement or you don’t.

As a binary buyer you are agreeing with the statement. As a binary seller you are disagreeing with the statement. You can trade numerous financial and commodity markets using the binary question:

Will the price of this market be above this strike price at this time?

For example: Will the current spot EUR/USD price at 1.1178 be greater than the 1.1200 price level at 3AM ET?

You might trade such a binary option starting at 9pm, when it has six hours left until expiration. If you think it will be greater than 1.1200, you buy the binary. If you think it will be less than or equal to 1.1200, you would sell the binary. With the current price at 1.1178, the seller would have the immediate advantage. But the outcome is determined at expiration: that’s when we decide who is right and receives the settlement payout. If you stay in your buy or sell position until expiration, you get the full settlement value of $100 per contract if you’re right, or zero if you’re wrong.

Nadex also allows you to exit your position before expiration, for whatever price the binary option is currently trading at. If you bought the option, you sell to exit, and vice-versa. As with any other trade, you buy at the offer price and sell at the bid price. These prices are determined solely by the supply and demand of the traders and not by the Nadex exchange.

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