How to trade stock indices with binary options
Gaining a better understanding of the stock index markets can open up new trading opportunities – especially when you learn to trade binary option contracts. This can make stock indices more accessible to traders who don’t want to spend large amounts of capital buying shares.
Learn more about binary option contracts based on stock index futures, what they are, and how to trade them on Nadex.
Types of stock indices
Stock market indices measure the value of a section of the stock market, via a weighted average of selected stocks from particular companies. These companies are usually selected from a certain industry or market sector.
It's very important to note that there are various stock indices that serve different purposes. There are the cash markets such as the S&P 500 listed on the New York Stock Exchange (NYSE). There are also futures markets such as the E-mini S&P 500® listed on the Chicago Mercantile Exchange (CME). Plus, there are exchange-traded funds (ETFs) and options indices.
At Nadex, when trading a binary option on a stock market index, you will always be trading a contract based on the stock index future. It is very important that any analysis done is conducted on the correct underlying market. For a list of the markets corresponding to the Nadex offering of stock index futures, please see our contract specifications.
What is a stock index binary option?
A binary option is a financial instrument that enables traders to speculate on markets without owning the underlying asset. A binary option based on a stock index future is a contract used for speculating on a particular stock index, such as the futures derivative of the S&P 500 or the NASDAQ 100. Traders buy or sell binary options depending on whether they think the underlying market will move up or down. Learn more about binary options, what they are and how they can fit into your trading plan.
What do you need to know before speculating on the stock index markets?
Many external factors affect the performance of stock indices. You need to know about these when trading binary option contracts – anything that affects the performance of stock indices may also affect your market predictions.
Some of the main factors that can affect the performance of stock indices are:
Market sentiment. The way investors feel about a market will directly affect their actions, which in turn can have an effect on stock index prices. If investors are losing faith and selling stocks, this will cause prices to drop. If other investors see this as an opportunity and buy stocks, then prices will rise again. A general awareness of market sentiment can help you trade binary option contracts more successfully.
News events. Any major news events affecting companies that feature on a stock index should be a key consideration for traders. Keep an eye out for news concerning mergers, acquisitions, and earnings. These can all potentially have a major impact on stock prices, which in turn can affect the overall index.
Government policy. Changes to rates implemented by governments can affect companies and have a bearing on share prices. Remain aware of new policies and rates when you’re trading.
You need to take these factors into account when trading binary option contracts based on stock index futures, as they will likely affect the predictions you make and the strike prices you choose.
What stock index markets can you trade on Nadex?
These are the stock index markets you can trade on Nadex with binary options:
Wall Street 30
Dow: based on CBOT E-mini Dow® Index Futures, tracking the performance of 30 major U.S. companies.
S&P 500: based on CME E-mini S&P 500® Index Futures: 500 large-cap common stocks on the NYSE & Nasdaq.
US Tech 100
Nasdaq: based on CME E-mini Nasdaq 100® Index Futures: tracking 100 leading non-financial U.S. companies.
US SmallCap 2000
Russell 2000: based on CME E-mini Russell 2000® Index Futures: tracking 2000 small-cap U.S. equities.
China A50: based on SGX FTSE Xinhua China A50® Index Futures: 50 firms on the SSE & Shenzhen exchanges.
Nikkei: based on SGX Nikkei 225® Index Futures: tracking the activities and sentiment of the Japanese stock market.
See all stock indices contract specifications available on Nadex.
How to trade stock index binary options
This will have provided you with a good overview of stock indices and how those markets can be traded with binary option contracts. The next step is for you to learn the ins and outs of trading binary options so you can begin formulating your own trading plan and putting your stock market knowledge to good use. Trading on the Nadex platform means you have a fixed level of risk, and you can access the market without significant capital, opening up new short-term trading opportunities on a daily and weekly basis.
These are the steps you take to trade binary option contracts based on stock index futures with Nadex:
Navigate to indices in the binary options menu in the Nadex platform.
You will see a list of indices along with the times you can trade on them. The time until expiration will be shown alongside each one.
Click on a time period, and you will be presented with a list of strikes. Each strike asks you a question: will this market be above this price at this time? It will look a little something like this: US 500 > 3262.5 (4:15 p.m.). What this is asking you is whether you believe the US 500 will be above 3262.5 at 4:15 p.m., which is the time the contract expires.
You should already have market predictions and analysis completed before you trade – pick the strike closest to your prediction. If you buy this contract, you are indicating that you agree with the statement that the indicative index will be higher than the strike price at expiration. If you sell, you are indicating that you disagree with the statement that the index will be higher than the strike price at expiration.
Learn to trade stock index binary option contracts.
This is the perfect place to learn the basics of trading binary option contracts, and to begin developing your own strategy. Discover a world of opportunity with binary option contracts based on leading stock index futures contracts.
Binary Options FAQs
What are binary options?
Binary options are a financial instrument that provide a fixed payout if the underlying market moves beyond the strike price. You decide whether a market is likely to be above a certain price, at a certain time. Trading a binary option is like asking a simple question: will this market be above this price at this time? If you think yes, you buy, and if you think no, you sell. Nadex Binary Options enable traders to predict the outcome of an underlying market’s movement. Learn more about how binary options work.
How do binary options work?
There are three key elements that make up a binary option contract:
The underlying market. This is the market you choose to trade.
The strike price. The strike price is central to the binary option decision-making process – to place a trade, you must decide if you think the underlying market will be above or below the strike.
The expiration date and time. You can trade binary options lasting for up to one week, with durations as short as five minutes.
Learn more about how binary options work.
Are binary options legal?
Yes, binary options are legal to trade with a regulated provider in the US. It’s not just legal to trade binary options in the US – it’s regulated, has low capital requirements, and is accessible to retail traders. Look out for CFTC regulation to make sure the exchange you are trading on has legal oversight to protect you against unscrupulous market practices. Additionally, ensure the exchange is based in the US and that you trade your own account. Learn more about how binary options are regulated.
Is binary options trading risky?
It can be! Here are some steps to follow so that you can trade binary options more securely:
Only trade with a CFTC regulated exchange.
Don’t engage with anybody who claims to be a broker, or who says they can trade your account for you.
Trade your own account.
Try trading binary options on a regulated exchange for free! The best way to trade more confidently is through practice on our binary options demo account with $10,000 in virtual funds.
How do binary traders make money?
Binary traders can make money by correctly predicting whether a market will be above a specific price at a specific time. At expiration, you either make a predefined profit or you lose the money you paid to open the trade. Binary options are priced between $0 and $100. Each contract will show you the maximum you could gain and the maximum you could lose. If your trade is successful, you receive a $100 payout, so your profit will be $100 minus the money you paid to open the trade. If your trade isn’t successful, you don’t receive a payout. This means you lost your capital, but nothing else, because your risk is capped.
What's the difference between options and binary options?
Binary options are short-term, limited risk contracts with two possible outcomes at expiration – you either make a predefined profit or you lose the money you paid to open the trade. The payoff is fixed on either side of the strike price. Options, also called vanilla options, have a payout that is dependent on the difference of the strike price of the option and the price of the underlying asset on one side of the strike price while fixed on the other. Options can be complex, difficult to price, and have the potential for outsized profits or losses.
What's the minimum deposit for a binary options trade?
At Nadex, you can open a live account for free - that's right, no minimum deposit required. Binary trades at Nadex are priced between $0 and $100, excluding exchange fees. The cost to place a trade is always equal to the maximum risk, plus any trade fees, which is required to be in your account when the order is placed. Not ready for a live account? You can practice trading binary options for free with our binary options demo account.