Nadex has made trading convenient for retail traders. There are numerous markets available 23 hours a day with multiple strike prices from which to choose. With so many alternatives, how can you know you are choosing the right binary option for your trade?
You may have questions such as:
- What expiration should I choose?
- Which binary will move fastest?
- Which ones move slower?
All are good questions. You want to allow enough time with the binary strike chosen that the underlying market can make its move to be right at expiration. However if the market does make the expected move too early, prior to the binary expiration, the full value of the binary is never achieved, it’s only at expiration.
The ladder charts help you visualize the binary strike levels in relation to the underlying market price. You can use the ladder chart to identify price movement of value more easily to see which strikes are more sensitive or not to the underlying price movement.
The image below will provide reference for understanding how to see the movement of value.
As a binary seller in this example, the >4772 binary strike was two points in the money since the indicative was at 4770. Assume that the current binary pricing stays consistent where we freeze time and volatility and suppose the market moved down to 4766. That move would make the strike below, >4768, two points in the money. If you were to sell the >4772 contract for 41.75 and the market moved down to 4766, you could buy to close your contract for 30.75. Find that number by looking at the buy price on the strike above the one you sold. It’s a ladder. As the market climbs up and down, the buy and sell prices follow.
Look at the buy side in the image below. The highlighted price is for the >4776 contract. By looking at the strike prices listed on the left, notice there are four points difference between each strike. If the market moved up one level, or four points, the >4776 contract’s value increases and the sell price is then 52.25. If the market continues to move up and gains eight points or two levels, then the sell price is 69.75. In the image, you can see that to find these potential prices, you look at the sell column and move down the corresponding amount of levels. Also, the opposite would be true if you sold a contract. In that case, the value of a contract decreases and you look at the buy columns and move up the corresponding amount of levels.
The ladder also tells the strikes that will move the fastest. The deeper in or out of the money they are, the slower they move. Look at >4764. The buy price is 88.50. If the market moves four points, you can sell it for only 91.25. The profit potential is only $2.50, barely enough to cover your fees! On the other end of the ladder, look at >4784, with the sell price of 7.25. The market moves four points and the buy price is 6.75. Since there is not much difference in the buy and sell prices that far Deep ITM or OTM, the market is going to move very slowly at those points.
Nadex has developed the Market Filter to help you find exactly the strike prices to fit the strategy you are using. It can be set for the desired market, binaries or spreads, expiration time, buy and/or sell as well as the prices you want. It helps you limit your options down to the ones you really want to see. As an example, you could set it for EUR/USD, Binaries, trading in the next three hours with prices between 30 and 75, and sell only. Once you log in to your demo or live account, find the Market filter on the main page on the left side.
One last thing to consider is the speed the market moves, as it gets closer to expiration. A strike further out until expiration will move slower than the same strike with less time until expiration.
In summary, make sure you have the right strike with the right expiration time. Give yourself enough time to be right with a good risk/reward ratio. Furthermore, study the strike ladders and learn what moves faster. Learn how OTM, ATM and ITM work, if you don’t know already.