Markets are flirting with all-time highs across multiple indices, as we now come into earnings season with the inauguration of a new President exactly one week away. With a variety of potential news events in the near term that could move markets, trading products with defined risk, like binary options on the Nadex Exchange, can be of great benefit to many types of investors. Understanding how binary options trade as time passes by is one of the most important factors to grasp before putting your money at risk.
Nadex offers binary options on a number of different indices, commodities, and currencies. Binary options on the Nadex Exchange include a variety of expiration duration periods ranging from as far out as weekly binary options, which expire on Fridays, to as short as 5-minute binary options in the Forex market.
Let’s take a look at a couple of weekly binary options on the indicative index, which is based off the CME E-mini S&P 500 Index March Futures. Here is a chart of the indicative index as of last night at 3:45 p.m. ET, leaving just over 24 hours until expiration (Friday at 4:15 p.m. ET). Along the right axis are a few of the weekly binary options available on the Index.
Fast forward to this morning at 7:15 a.m. ET and here is the same index, with the same binary options listed along the right axis, yet now there is only 9 hours remaining until expiration as opposed to over 24 hours. With the indicative index trading within a half of a point of where it was in last night’s chart, the only material difference in the pricing of the binary options has been the fact that over 15 hours has elapsed.
If you were bullish the S&P 500 last night and had purchased the >2,274.50 binary option you would have had to risk $26.25 for a potential profit of $73.75 if it expired in the money for full value of $100. This morning, about 15 hours later, that same binary option would only cost $14.50 for a maximum profit of $85.50. Last night you would have been risking $1 for every potential $2.81 of profit. This morning that same binary option would allow you to risk $1 for a potential $5.89 in profit.
The only major difference in these two trades is that last night you had about 24 hours until expiration, as opposed to this morning you now only have 9 hours until expiration. The risk vs. reward of these trades has changed dramatically, as it should when so much time has elapsed.
If you were bearish the market you could make a similar example trade by selling the >2,250 binary option. Last night you could have sold the >2,250 binary option at $86, which would put your risk at $14 (When selling binary options your risk is to the upside if they expire for full value of $100). That same binary option you could sell this morning for $93.25, risking only $6.75 for a maximum profit of the $93.25 you originally sell it for.
Depending on your market expectation, some traders would have been willing to pay the extra premium for overnight exposure, where as others may have preferred to wait to initiate their trade until this morning. Understanding the value of time when trading binary options will allow you to better execute any trading strategy.
Now is a great time to open a demo account with Nadex to see for yourself how their products react to underlying market moves. Understanding the value of time when trading binary options, or any of their defined risk trading products including their spreads, is an important fundamental aspect that all traders should understand before putting their money at risk. Trading with a demo account is a great first step in that direction.
Note: Exchange fees excluded for calculations.