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 both the novice and more experienced trader, a variety of trading strategies with variable risk and increased flexibility.
Furthermore, an on exchange broker offers traders all the benefits of those available in the futures world.
Whilst binary options are relatively limited at present, and on exchange even more so, over the next few years this is likely to change, and I hope change very quickly. It needs to, if the instrument is not to be tainted by the bucket shops. As I mentioned in the previous chapter, one big broker has already gone to the wall, and others will follow.
It is a crowded market, and despite the growth projections, there will be other casualties.Before we move away from the world of fixed odds, let me just highlight the common thread that ties these two worlds together, which is this. Both approaches are premised on the fact that your risk is known and capped, but equally your profit is also limited. This is back to the horse racing analogy.
You place a bet – your limited risk, and hope your horse wins the race for a limited profit. Your loss and potential winnings are both known in advance. You cannot lose more than you have staked on the race, and you cannot win more than the odds dictate.And at this point you may be wondering how can one instrument be so different from another, if the risk and reward profiles are the same?
A good question, and one I hope will be answered for you as we begin to explore on exchange binary options in more detail. On Exchange Explained:First let me explain what I mean by on exchange, and why I believe it is so different. And by on exchange, I am simply referring to binary options which are bought and sold through a regulated exchange. If you have ever bought or sold a stock or a share, your order will have been transacted through a central exchange.
In this case a stock exchange such as the New York Stock Exchange or the London Stock Exchange. Stocks are bought and sold with the process managed by the exchange. The same is true in the futures market. Here we have major exchanges such as the CME and the CBOE, which provide the meeting place where buyers and sellers can trade futures and options in a fair and transparent market, with the exchange matching buyers and sellers.
This process is completely transparent and provides a level playing field to all participants, large or small. The exchange does not take positions, but merely matches the two parties.The early days of commodity trading can be likened to the binary options world we have today. Before the establishment of a central exchange, buyers and sellers would meet, but with no central body to arbitrate, manage or standardize contracts, problems often arose in contract delivery.
The creation of the CME, and other exchanges were fundamental in the establishment of a regulated and orderly market, and I believe the same applies to the binary options world today. The futures exchange is a true zero sum game. If one trader wins then another loses. Traders buy and sell with complete confidence in the full knowledge the playing field is level, the exchange is regulated and secure, and the process from start to finish is transparent. In my opinion this is the ideal.In the remainder of this chapter I am going to focus on one company in particular.
That company is Nadex, who I believe are the industry leader in offering on exchange binary options and whom I also consider to be best of breed at the time of writing this book. They have kindly allowed me to reproduce many images from their trading platform which I hope will help to explain why I believe an on exchange approach to trading binary options is one which provides many benefits and few drawbacks. As the market matures, I am sure others will also follow this model.However, at this point let me make one thing clear.
I am not affiliated to Nadex in any way and have no commercial relationship with them whatsoever. The reasons I have focused on them are as follows:They offer products which blend the best of off exchange instruments into a binary option which also draws in some of the characteristics from the vanilla world They operate as an exchange, so gone are all the issues of price manipulation, lack of price transparency, security of funds and information, access to funds, and clever marketing.