Binary options let you trade based on a simple yes/no question about the direction a market is likely to go:
"Will the price of this market be above this strike price at this time?"
Binary options allow you to set your own risk/reward: you can't lose more than you paid to enter the trade.
What are strike price and expiration?
The strike price is like a line in the sand dividing one outcome from the other. At the expiration time of the binary option, if the price of the market is above that line, the answer is yes.
If the price of the market is at or below the strike price at expiration, the answer is no.
If you believe the answer at expiration will be yes, you buy the binary option. If not, you sell.
Cut your losses or take profits early
Nadex also allows you to exit your position before expiration, for whatever price the binary option is currently trading at. You can do this if your trade is losing money and you want to get out before losing the entire amount you paid at entry. You can also exit early to take profits. For example, if you bought a binary option which is now trading at $95 and you don't want to wait another hour for the last five dollars, you can get place an order to sell at 95.
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.
Your profit or loss is the difference between your entry and exit prices.
Define your own risk and reward
The price to buy or sell will be somewhere between 0 and 100 dollars. That amount will be your total risk. You can never lose more than you paid to enter the trade. That's how binary options allow you to define your own risk.
At the expiration time, whichever side is right will get the full payout of $100. Your profit is 100 minus your entry price, minus the fees. On Nadex, the fee would be $2 ($1 to enter, $1 at settlement).
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.
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?
Buy if you think it's true; sell if you think it's false
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:
Will the current spot EUR/USD price at 1.1178 be greater than the 1.1200 price level at 3AM ET?
As a binary seller you are disagreeing with that statement.
Here's an example of a binary option trade:
At 9pm, the EUR/USD > 1.1200 binary option 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 initial advantage since the binary is currently "out of the money," meaning the market price is still below the strike price of 1.1200.
The final outcome will be determined at expiration: that’s when we decide who is right and receives the settlement payout of $100 per contract.
If the market is still at or below 1.1200 at 3AM ET (the expiration time), the seller will get the $100 payout.
If the market is even slightly above 1.1200, the buyer gets the full payout. That is the all-or-nothing outcome at expiration.
If you don't want to wait until expiration, Nadex also allows you to exit your position before expiration, at the current market price. Your profit or loss in that case is the difference between your entry and exit prices.