Binary Options: Exchange traded or Off-shore Providers?

Binary Options: Exchange traded or Off-shore Providers?

There are some binary options where you put on a position and you’re stuck in the trade until expiration, so your trade is for all the marbles. Generally these types of binaries are offered by off-shore providers.

Binary Options: Exchange traded or Off-shore Providers?
Binary Options: Exchange traded or Off-shore Providers? Getty Images

This type of binary usually displays a chart of the underlying market with a horizontal line representing the underlying market price on a continuous basis. The reality is this is an at-the-money (ATM) binary when you place the trade, where the up arrows and down arrows are displayed with the payout returns you would receive at expiration if the trade ends with a favorable binary outcome.

The binary options at Nadex do not offer a continuous ATM binary choice, but many listed strike levels for set time periods, from 5 minutes to a week in duration before expiring. This gives the trader more choices of strikes that can best fit the trader’s bias; with the risk/reward scenario the trader is most comfortable. Remember as the underlying price moves relative to the fixed strike levels, the profitability changes.

The Nadex trading platform displays only the initial cost and profit, not the return of the trade. The binary price trades between 0 and 100, with the price movement based on the relationship of the underlying market price, the strike, time till expiration and volatility. So if you want to compare apples to apples, the formula is quite simple: the profit/cost = percent return.

Just comparing an ATM binary where the underlying market is trading at or near the strike, the return is around 100 percent (not including the exchange fees). The binary settlement payout is $100 so naturally the price should be in the middle, priced at 50. With the ATM neither the buyer nor seller has an immediate trade advantage prior to expiration. The return for an ATM binary would be around 100% (cost-$50/ profit- $50), but exchange fees would bring that down slightly at a $1.80 RT per contract.

It might be wise to compare returns to make sure you’re getting the best deal when you’re trading binary options.

The information contained above may have been prepared by independent third parties contracted by Nadex. In addition to the disclaimer below, the material on this page is for informational and educational purposes only and should not be considered an offer or solicitation to buy or sell any financial instrument on Nadex or elsewhere. Please note, exchange fees may not be included in all examples provided. View the current Nadex fee schedule. Nadex accepts no responsibility for any use that may be made of these comments and for any consequences that result. No representations or warranties are given as to the accuracy or completeness of this information. Consequently any person acting on it does so entirely at their own risk and any trading decisions that you make are solely your responsibility Trading on Nadex involves financial risk and may not be appropriate for all investors. Past performance is not necessarily indicative of future results. Nadex instruments include forex, stock indexes, commodity futures, and economic events.

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.