A Couple Reasons Why Binary Options May Be for You

A Couple Reasons Why Binary Options May Be for You
A Couple Reasons Why Binary Options May Be for You
A Couple Reasons Why Binary Options May Be for You Getty Images

Are you eager to speculate in the direction of the equity markets, but short on capital & time?

Consider trading binary options as a solution to your conundrum which has a low barrier to entry. Compared to futures and equity options, binary options have substantially lower capital requirements where opening an account can be done with as little as $100 and never be concerned with receiving a margin call.

This is one of the reasons why binary options have been gaining popularity particularly with the people who have limited capital but eager to speculate in the markets.

Another reason why binary options are interesting as the instruments uses in volatile markets where the underlying market pricing can have wild price swings. With the binary option contract, no matter where the underlying price goes between the time you initiate your position to the contract expiration, you know that at the settlement, the outcome will always remain the same, i.e. “binary” The contract is either “in the money” or “not in the money”; only one party will receive the $100 settlement payout per contract.

You can design a directional binary trade the same way you would design a typical equity option. For example, if you believe the S&P 500 futures will close over 2050 on Friday, you would buy the Nadex S&P 500 > 2050 binary expiring Friday after the close because you are anticipating the price of the S&P 500 futures contract would close over the 2050 level.

Knowing the binary contract has a value of $100 at expiration combined with knowing your initial cost results effectively in fixed odds of the binary outcome finishing favorably. If the price of the S&P 500 futures settles over 2050 Friday, then your binary statement S&P 500 greater than 2050, as a binary buyer you will receive the binary settlement payout of $100 per contract.

Depending where the underlying futures price was trading relative to the 2050 binary strike level will impact your initial binary cost. When you make a trade, you have agreed on the amount of risk per contract you’re willing to accept. The difference between your risk (cost) and the settlement expiration payout is your profit potential, assuming the binary finishes in the money.

When initiating a binary trade and the underlying market is near the strike, the binary may be priced around 50 which would be a $50 cost for the binary buyer. Compared to a higher binary strike where the underlying price is below the strike, the binary price would be less than 50 which is dependent on this differential (strike/underlying) and time left before expiring.

A binary priced at 30 would obviously be a cheaper initial cost for the binary buyer but the trade is initially at a disadvantage compared to the binary strike that is priced at 50.

However the flip side with binary options referring to the example, is that if the S&P 500 closed below 2050 on Friday, you lose all of your initial investment that you paid for the binary option.

The good news, you don’t always have to trade for all the marbles with binary options but you can offset your trade early to take an early profit or cut your losses.

Remember your risk is always capped when trading binary options as your risk is limited to the price you paid for the binary option contract and nothing more. You are essentially paying for the right to earn a predetermined return if the contract settles in the money, and your risk is always only what you paid for the binary option.

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.