When trading binary options, you can exit your trade in two different ways:(1) You can wait until expiration and have your trade settled at $0 or $100 per contract, or (2) you can exit your trade before expiration for the fair market price.Commissions for Trade Exit and Settlement Unlike with regular put and call options, binary options brokers typically will require you to pay commissions any time that your trade is settled in‐the‐money.
You will always have to pay commissions to enter the trade.You will also always have to pay commissions to exit the trade prior to expiration whether it is profitable or not. If you wait until expiration, typically you will have to pay commissions only if the trade is settled in profit.
If your trade loses and is settled at $0, then you will not have to pay commissions.Look at Exhibit 6.3 to determine the cases in which you typically will or will not be required to pay commission. This table details the commissions resulting from exiting a trade before expiration or after expiration.Exit at Trade Expiration If you followed the prior examples in this text, you should have a pretty basic understanding of what happens with binary options when they expire or are settled. Each contract will have a predefined expiration time and date (if necessary).
Losing at Expiration If you wait until expiration and your trade expires for a loss, then you will simply lose your collateral and not get anything at expiration. This holds true whether you bought or sold an options contract.For example, if the underlying is trading at 1250 and you purchase a 1230 contract for $70 and the underlying falls below 1230, then you will lose the $70 that you purchased the contract for at expiration.
Now let’s looks at a sell example. Let’s assume that the underlying is also trading at 1250 when you make your trade, and you sell a 1280 option for $30. You will have to put up $70 collateral ($100 – $30 options premium).If the underlying is trading at or above 1280 at expiration, then you will lose on your trade. In this case you will again simply lose the $70 collateral that you put up to enter the trade.Since both of the previous scenarios ended up in a loss, you will not be required to pay commissions to exit your trade.
Winning at Expiration If your trade ends up in‐the‐money at expiration, you will collect $100 regardless of whether you entered a short or a long position.Exhibit 6.4 details the payout of a trade expiring in the money.Let’s look at a basic example where the underlying is the S&P 500 futures and it is trading at 1250:If you purchase a 1270 call for $30 and the S&P 500 futures go up and close above 1270 at expiration, you will collect $100 revenue per contract.Exhibit 6.5 depicts a long 1270 binary option at expiration with a payout of $100.
The x‐axis represents the price of the underlying, and the y‐axis depicts profit. The shaded area represents the payout that will be credited to your account if the S&P futures are above the 1270 strike price at expiration.If you sell a 1270 call for $30 per contract, you will have to put up the $70 collateral. As long as the US 500 stays below 1270, you will be able to collect $100 revenue per contract at settlement.
Exhibit 6.6 depicts a short 1270 binary option at expiration with a payout of $100. The x‐axis represents the price of the underlying, and the y‐axis depicts profit. The shaded area represents the payout that will be credited to your account if the S&P futures are below the 1270 strike price at expiration.
When you receive the $100/contract trade settlement on your winning trades, you typically will be charged a commission on your exit. This commission may be referred to as a settlement fee. Once the broker settles,your account balance will go up by $100 per winning contract and you will typically receive an e‐mail confirming that you won on the trade and received a settlement fee.