Bullish: Buying Out Of The Money (OTM) Binary Options

Bullish: Buying Out Of The Money (OTM) Binary Options

Binary options have Out of the Money (OTM), In the Money (ITM), and At the Money (ATM) offerings and as a trader, you can choose to buy or sell any of the contracts offered, depending on the position you want to take. The binary option has an underlying market price and a binary strike price level. This article will focus on buying an OTM binary option.

Bullish: Buying Out Of The Money (OTM) Binary Options
Bullish: Buying Out Of The Money (OTM) Binary Options Getty Images

If you choose to be a binary buyer, at expiration, you are predicting that the underlying price will be trading higher than the particular binary strike price level. If you are correct at expiration, you will receive $100 per contract, exchange fees not included.

If you buy a binary strike that is above the underlying market price, you are buying an OTM binary. At expiration, the underlying market price has to be trading above the strike in order for the binary buyer to receive the settlement payout.

When initiating a trade, the bigger this trade disadvantage for the binary buyer, is a result of the underlying market price farther below the binary strike level. The price of a binary will always be between 0 and 100.

To transition this binary trade disadvantage with the binary pricing, the binary buyer will have a cheaper initial cost or a lower binary trade price in that 0 to 100 price range. For the binary buyer, the initial trade cost is based on the binary trade price

Two binary strikes are shown below for the USD/JPY. The underlying is currently trading at 107.380.

USD/JPY>108.00 offer price is 12.25

USD/JPY>107.60 offer price is 35.00

For the USD/JPY>108.00, the difference between the strike and underlying trading price is 62 pips. For this contract to be profitable, the USD/JPY market would have to move over 62 pips at expiration. This is a big disadvantage when compared to the 107.60 strike. However the initial cost for the binary buyer is $12.25 per contract which is a 716% return if the binary finishes in the money at expiration.

The USD/JPY>107.60 strike has less of an initial trade disadvantage. The difference between the 107.60 strike and the currently underlying price is only 22 pips below the strike. To receive full profit at settlement, the USD/JPY would only have to rally more than 22 pips. But notice this strike is priced higher as this strike has less of a disadvantage to the OTM binary buyer as there is not as much movement needed in order to be profitable. Here the initial cost for the binary buyer is $35.00 per contract which is a 186% return if the binary finishes in the money at expiration.

Note there are many strike levels and duration’s to choose from the binary option chain but remember it is the underlying market bias as to the root of your trade decision.

(Exchange fees not included in calculations)

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 contracts are based on underlying asset classes including forex, stock index futures, commodity futures, cryptocurrencies, and economic events.

Trading can be volatile and investors risk losing their investment on any given transaction. However, the design 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.