When reading a binary option quote, there are several fundamental components that you should understand and identify. These fundamental components are: the underlying asset, the strike price, the expiration time and date, and the bid/offer.Underlying asset or market.
This component of the quote identifi es the underlying asset on which the binary option contract is traded. As you learned in Part Two, binary options can be traded on multiple instruments,including index futures, commodity futures, spot forex, and economic data releases.US 500 (Mar) In the image above, the underlying asset is the March Standard & Poor’s (S&P) 500 futures.Strike price.
The strike price represents the true or false condition relative to the underlying market. More simply put, the strike price is your price target to be achieved or not achieved based on your position (long or short).US 500 (Mar >1223.0 4:15PM)In the image above, the strike price for this US 500 (S&P 500) binary is 1223.0.Expiration time and date. As you have learned, binary options are available with multiple expiration times and dates.
The possibilities are weekly options, daily options, and hourly options. This component is critical, based on your trading strategy.US 500 (Mar) >1223.0 (4:15PM)In the image above, the expiration time for this binary option is 4:15 P.M. EST. Bid and offer. When viewing a price quote, you will see two different prices; these are known as the bid and offer. The bid is the price at which you sell the binary option.
The offer is the price at which you sell the binary option. These two prices will fluctuate until expiration. Both the bid and the offer prices of binary options must remain in a range from $0 to $100. Also, please keep in mind that each point on a binary option is equivalent to $1. Bid—the price to sell the binary option.60.50 64.00 Above, you see an example of the bid for this US 500 binary. As you can see, if you were to sell the US 500 option discussed above, you would do so at the $60.50 price.Ask—the price to buy the binary option.
Above, you see an example of the offer for this US 500 binary option.In this example the current price to buy this binary option is $64.50.The price quote above shows a spread of $3.50.READING AN ORDER TICKET:Now that you are able to identify the underlying asset, strike price, and bid/offer prices, let’s take a look at an order ticket. As you can see, the order ticket in Exhibit 6.1 has the same parameters you just learned about.
The underlying asset is the US 500 (S&P 500 futures), with a strike price of 1248.5 and a bid/offer of 41.00/45.50.Anatomy of an order ticket:Contract information. Underlying asset, strike price, and expiration time and date.Bid and offer prices.Order details. This is where the direction (buy or sell), number of contracts (size), and price are displayed. If you believe that the US 500 will go up and close above 1248.5 at expiration, then you would buy. If you believe that it will go down or stay at its current price and close below 1248.5, then you would sell.
Also, in this section you can enter the order type that you want to place.If you want to simply take what the market is giving you, you can place a market order to buy now at the ask price or sell now at the bid price.If you want to get a better price than the current asking price, you can place a limit order. When buying, you will attempt to get in below the ask price, and when selling, you will attempt to get in above the bid price.
You can also go in between the spread with a limit order. For example, in this particular case you can place your limit order at 43 to get a better fill than is currently being offered. Of course, when you use a limit order to enter your trade, it may take longer to get filled, or you may not get filled at all and miss your opportunity.You can also place a stop order to buy or sell.
If you believe that the underlying needs to break out of a price range and want to enter only if it does, then you can place your stop order above the offer price. If you believe that the underlying will break below a price range and want to enter only if it does, then you can place your entry order below the bid.Exhibit 6.2 details the various types of entry and exit orders.Max profit, max loss, market ceiling, and market floor are defined for you. It simply shows what is the most you can make and the most you can lose on the trade if you hold until expiration.