Binary Option Tips: Exiting Binary Trades before Expiration?

Binary Option Tips: Exiting Binary Trades before Expiration?

Binary Option Tips: Exiting Binary Trades before Expiration?
Binary Option Tips: Exiting Binary Trades before Expiration? Getty Images

With some binary providers you cannot exit your trade prior to expiration. On Nadex, however, you can offset your trade early to take an early profit or to cut your losses. Or you can just wait until the binary expires to see if you get the settlement payout or not.

There are a couple things to think about -a profit is a good thing and a loss is a bad thing.

Hitting singles consistently is good, versus striking out all the time because you’re going for the home run.

For binary options, the contracts are small where the settlement at expiration is $100 per contract. So the trader’s initial cost/contract is going to be some portion of $100 and the profit is probably going to look small as well.

Don’t be fooled. Look at the binary as a return; think in terms of the ROI on a very short term trade. No we are not going to try and annualize it for you. Don’t get overwhelmed with greed! Keep things in perspective, and remember a profit is a good thing. No one should ever complain.

Let’s say you bought an out-of-the-money (OTM) binary at a price of 10. And then let’s say the underlying pops but is below the binary strike, which is quoted at 38 bid/42 offer. If you were to close out of your trade early and hit the bid, your profit would be $28/contract (fees not included). The profit may seem small, but when comparing the dollars at risk on the trade, your return would be 380%. Why should anyone complain about that?

Let’s say you bought an in-the-money (ITM) binary at 85. That means your initial cost is $85/contract, but you have the immediate trade advantage. The underlying market price is above the strike and that’s all you need at expiration to receive the binary settlement payout. The profit on this trade would be only $15 if the binary finishes in the money at expiration (fees not included). But remember you’re risking $85 to make $15.

What happens if the underlying market starts to sell off? The binary price starts to sell off and if the underlying trades lower to the binary strike level, the pricing should be around 50. That would mean your binary trade position is down $35/contract. If the underlying price keeps selling off, the picture gets worse. The point I am making is that you are allowed to cut your losses and close out a binary trade prior to expiration.

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Nadex binary options and spreads can be volatile and investors risk losing their investment on any given transaction. However, the limited-risk nature of Nadex contracts ensures investors cannot lose more than the cost to enter the transaction. Nadex is subject to U.S. regulatory oversight by the CFTC.