Premium Collection Using Binary Options

Premium Collection Using Binary Options

When trading Nadex binary options, you may have heard of premium collection. Perhaps you wondered how to accomplish this especially in the forex markets using binary options.

Premium Collection Using Binary Options
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To collect premium using a forex binary option, one possible strategy is to buy or sell Deep In The Money (DITM) contracts. This binary strategy is not to be confused with credit spreads, as going long or short a binary option is always a debit or cost. Thus with the binary strategy to collect premium, you are receiving edge by initiating a higher probability trade of finishing in the money at expiration.

For example, if the GBP/USD is currently trading at 1.2340, a DITM contract could be 1.2300, with a buy price of  82.50. The risk is high at 82.50 and the potential reward is 17.50 but there is 40 pips of edge. With Nadex binaries, the risk is limited, but you could limit the risk further by exiting the trade if the underlying market hits the strike price. You could exit the trade with a loss of around $30-40 instead of the full $82.50 where the binary would be priced around 50 when the underlying is trading at the strike level.

Here’s an opposite, yet similar example. Still looking at the GBP/USD market, currently trading at 1.2340, let’s suppose you believe the market is going to go down. A DITM strike is 1.2380 sold for 22.25. The risk on this contract is $77.75. Again, this is high risk, but can be limited.

Both of these premium collection trades can make money if the market moves three ways. On the buy trade, as long as the market goes up, stays flat or goes down a limited amount, the trade will profit as time expires. At settlement, as long as the market is above 1.2301, it is profitable.

On the sell trade, as long as the market goes down, stays flat or only goes up a limited amount, the trade is profitable as time expires. In this case, at settlement, you want the market to remain at or below 1.2380 in order to be profitable.

Deep in the money binaries are already a true statement when the trade is entered. The market must simply continue in its current trend, stay flat or only slightly retrace. Then profit will be attained while time expires.

The goal on a Premium Collection Trade is to get in, collect as much premium as possible and get out. These trades do not need to be held until expiration. The trick to remember is that the trader can collect their premium as the binary’s time expires. Exercise care to further limit losses, as mentioned above.

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.