The strike price is like a line in the sand. If the price of the underlying market is above the strike price at expiration, a binary buyer finishes “in the money,” meaning the buyer’s binary option will pay out $100.
If the price of the underlying market is at or below the strike price at expiration—at the money or out of the money—the binary buyer receives nothing.
For the binary seller, the strike price is also the line in the sand separating profit and loss at expiration. However, if you sell a binary option, you receive $100 if the binary expires at the money or out of the money, meaning the market price is at or below the strike price. You receive zero if the market is above the strike price.
This all-or-nothing payout design means that binary options can return large returns on small market moves. As long as the market is above the strike price by even the smallest increment (one tick or one cent, etc.) at expiration, you will receive the full settlement payout of $100 per contract.
Or to put it another way, you only have to be a little bit right to get the full payout.
Nadex spreads have two strike prices which represent a price range. The strike prices define the upper and lower ends of that range.
When the price of the underlying market is below the range, the spread value goes to a minimum but doesn’t drop any further. For buyers, this represents the maximum possible loss. A buyer cannot lose any more, no matter how far the underlying market drops.
When the price of the underlying exceeds the range, the spread reaches its maximum, at which buyers receive their maximum possible profit.
The price of the spread itself is related to the price of the underlying market, but adds an adjustment that reflects that risk protection and the resulting edge the trader receives. In the middle of the range, the spread price and underlying market price will have a close correlation. At the upper and lower extremes of the range, the spread price approaches its maximum or minimum limit.
When you buy a spread to initiate a position, your cost reflects the difference between the lower strike price and the current spread price. When you sell a spread to initiate a position, your cost is based on the difference between the higher strike and the spread price. The price at any time is determined solely by the buyers and sellers. Nadex does not participate in trading or pricing.
Unlike binary options, with spreads both the buyer and seller may receive settlement payouts as long as the Nadex expiration value falls within the range between the upper and lower strike prices. If the market is above or below the range at expiration, either the buyer or seller may lose their initial cost. However, they cannot lose more than that amount, because Nadex Spreads have guaranteed limited risk.
When the underlying is trading at the strike level prior to expiration the contract is priced around 50 which is around $50 per contract either going long or short. The is basically half the value of the $100 settlement value at expiration
When the underlying price is trading near the low strike or lower, then the spread price should be priced near the lower strike of the spread range. As for the Nadex spread buyer, the spread cost is very small representing a smaller fraction of the total spread range value. This cost value is based on the differential between the spread price and the lower strike which acts as the floor.
For the Nadex spread seller, the spread cost is much larger as it represents a large percentage of the total spread range value. This cost value is based on the differential between the spread price and the higher strike which acts as the ceiling.