As we already know, the binary option only has two outcomes. It is either true and closes at 100, or it is false and closes at 0. This is all dictated by the strike price. As a binary options trader we therefore have only one decision to make as follows, and on the Nadex platform:
If we believe the strike price will be exceeded at expiry then we buy If we do not believe the strike price will be exceeded at expiry then we sell However, just to reiterate the above buy and sell is as follows:We buy (purchase) if we agree with the statement, and sell (purchase) if we disagree.
The buttons on your trading platform may say many things. They may say, buy and sell, call and put, purchase and purchase, agree or disagree. However, in all these cases you are in effect buying – buying to say yes, and buying to say no. The Nadex platform uses buy and sell, but it is the above context of agreement or disagreement.
Buy to say yes, and sell to say no.Just as in the futures market where buyers and sellers are matched by the exchange, so the same occurs here.This instantly removes the issues associated with many bucket shops where you are often trading directly against them. In an exchange traded binary option this never occurs.
The exchange simply matches buyers and sellers, and every option is fully collateralized by the two parties in cash. Unlike some futures, binary options are always cash settled so there is never any physical delivery to worry about.
Anything is possible. This is why a binary option is quoted in probabilities. But on balance this option is deep in the money with the index trading well above the strike price of 1828, and with a current probability of 85.75. However, with time eroding fast this option will increasingly tend to 100, even if … Continue reading
In this example there are several key points to note, and perhaps the first is whilst this is a ‘static’ schematic, if you were looking at this in real time the probabilities on the right hand side would be changing constantly, reflecting the constant changes in the underlying contract. And, if this looks a little … Continue reading
I am very conscious that in the descriptions and explanations thus far I have referred to the ‘binary option proposition’ and the ‘option proposition’ as I wanted to introduce the various terms and terminology in logical steps, and so avoid overwhelming you as the reader. However, I feel it is now time to introduce two … Continue reading
If the binary is based on the market being higher than a certain price level by expiry, then once the option has moved beyond this level it is considered to be in the money (ITM). It has some ‘price value’ by virtue of the option having a higher probability of closing with a ‘true’ result.In … Continue reading
First, time erosion increases exponentially. It is not linear as the effects increase dramatically the closer we are to expiry.Second, as we move along the time axis, and towards expiry the probability of the event not being true tends to 0, and the probability of the event being true tends towards 100. We saw both … Continue reading
Expiry and time are two of the fundamental concepts you have to understand as an options trader, whether in the world of binary or vanilla options. These concepts are very familiar to options and futures traders, but less so to those who have never traded these instruments. We did touch on these concepts in an … Continue reading
Let me start by outlining what I believe constitutes an on exchange binary option, which will then lay the framework for the remainder of the book. There are four basic characteristics I consider to be essential and these are as follows:A binary option is quoted between 0 and 100.A binary option can be closed at … Continue reading
If the previous chapter made rather depressing reading I hope this chapter will redress the balance a little. As you will discover in this, and subsequent chapters, an on exchange binary option is an entirely different instrument to those we have discussed thus far. This class of binary option moves towards vanilla options, and offers … Continue reading
First, let’s start with how the binary options are presented, and whether they are quoted as binary probabilities. The short answer is no. All of these companies quote a fixed proposition in terms of odds and time. And the reason for this is very simple to understand if we go back to our fixed odds … Continue reading