Nadex 5-minute binary options explained
In this tutorial, you’ll learn how to trade 5-minute binary options.
We’ll show you:
How to pick contracts based on probability and ROI
Various possible outcomes from ATM and OTM contracts
Why trading 5-minute binary options on Nadex gives you more choice and opportunity
5-minute binary options: video summary
In this video, we’ll discuss the key differences between Nadex and other binary option providers.
Most binary option platforms provide only one choice: will the market go higher or lower in the next five minutes.
Nadex has various contract durations:
There are different price levels (strike prices) for you to make your prediction around, which gives you various opportunities.
Nadex 5-minute binary options: your choices
At-the-money (ATM): the contract with a price level that is approximately the same as the current indicative price.
There is roughly a 50/50 probability of predicting correctly with an ATM contract, giving you the potential of a 100% return on investment.
On the order ticket, you’ll see the specifics for this binary option. This example asks the question:
Will the EUR/USD finish higher than 1.1789 @ 3:30 p.m. Eastern?
If you think ‘yes’, you buy. If you think ‘no’, you sell.
If you buy at $49, you’d risk $49 to potentially make $51 – a Nadex binary option is worth a maximum of $100.
To be clear:
$100 - $49 = $51 profit (excluding exchange fees).
Your maximum potential profit or loss is clearly shown before you enter a trade.
An important note: the midpoint between the bid-ask prices is the market pricing the probability of the question being true. The buyer in this example has roughly a 44% probability of being correct.
As the indicative price moves around the strike, the probability of the statement being true will fluctuate above or below 50%.
Out-of-the-money (OTM): a contract where the price level is above the indicative price, which means a lower probability of your prediction being correct.
This order ticket asks:
Will the EUR/USD finish higher than 1.1791 @ 3:30 p.m. Eastern?
If you buy at $24, you’d risk $24 to potentially make $76. If you’re correct, your ROI would be roughly 300%.
To be clear:
$100 - $24 = $76 (excluding exchange fees).
The midpoint between 16 and 24 is the market pricing the probability of the buyer being correct. The buyer would have a roughly 20% chance of being correct. They would pay less for this option since the indicative price is below the strike – the market would have to move higher for the contract to be profitable. As such, the potential reward is also higher.
Once again, your potential maximum profit or loss is clearly shown before you enter a trade.
If you thought, ‘no, this isn’t going to finish above 1.1791’, you could sell the contract at $16.
Probability of buyer being correct is around 20%
Probability of seller being correct is around 80%
If you sell, you’d risk $84 to potentially make $16 in the next few minutes (excluding exchange fees).
5-minute binary option roundup
The mid-point between the bid and ask is the probability of the buyer being correct at that moment
Be sure to understand the probability of success before entering a trade, whether buying or selling
Be clear on the risk versus reward on a trade (this is calculated on the order ticket)
Lastly, when trading binary options, you can exit a trade early. This can help you to lock in profits or limit losses.
Try trading 5-minute binary options for free
Download a Nadex demo account. You’ll get $10,000 in virtual funds, so you can practice trading 5-minute binary options.
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