The binary option ladder in Fig 4.15 is displaying a selection of options contracts on the US 500 index. On the left in the Contract column you can see the various strike prices in the ladder moving down in 3 index point increments, from 1806 at the top to 1857 at the bottom. At the time of writing the index was trading in the 1835.50 area with several hours left to run. The underlying futures contract is shown in brackets (March) and the expiry time for all these contracts is the end of day when the physical exchange closes at 4.15 pm ET.
Alongside is the expiry date for the contract in the Expiry column. For the time being don’t worry about the Bid Size column as we will come back to that later. Then we come to the Bid and Offer column where our binary option prices are quoted and we buy and sell as follows:1.We buy on the offer2.We sell on the bid.As you can see here the spreads vary, moving from a minimum of 3.50 at the extremes of the ladder, to a maximum of 6.50 towards the mid-point and this is the typical profile of spreads – a bell curve of spreads if you like.
As I have stressed above and throughout this chapter, these will move extremely quickly and even more so if the markets are volatile, which is good news for option traders.In Fig 4.16 we have a further selection of contracts, this time on gold. The contracts here are a mixture of those closing in a few hours (11AM) and those closing at midnight (12PM) (ET). Here you can see strike prices for gold move in $1.5 per ounce increments and the spreads between the bid and the offer are a little wider on these contracts, owing to lower liquidity.
Here the spreads vary from a minimum of 4.50 to a maximum of 6.00 at the mid-point with the strike increments in 50 pips. Just to end on the bid and the offer. There is an easy way to remember what your profit and risk on expiry will be, and this is as follows:1.when you are buying the offer, this is showing your maximum risk 2.when you are selling the bid, this is showing your maximum profit If you recall you do not have to take the bid and offer that is being quoted. This is a further benefit of trading an on exchange binary option.
You simply place an order outside the current quote range and wait for the order to be filled or not. This is executed on the Nadex platform using the Limit Order. When the probability ladder moves outside of a quotable range, the exchange will not offer a price hence these will remain blank. In addition when these move close to expiry you may also find prices are not quoted.Moving to an order ticket from the platform here we can see how it all comes together. In addition to the spread there is also a commission charged by Nadex on each contract which is 0.90 cents per side or $1.80 per round turn. To open and close a position will cost $1.80.
Whilst this is not a significant cost in dollars it can be significant if you are scalping, and perhaps even more so, if you are only trading single contracts. As you increase the number of contracts traded this becomes increasingly less significant as Nadex do offer a cap of $9 per order for multiple contracts. And here is an example of an order ticket from the Nadex platform. In Fig 4.18 I have selected a weekly contract for the USD/CHF.If we start at the top of the ticket, here you can see the contract we are trading is the USD/CHF currency pair.
It has a contract strike price at expiry > 0.8875 at 3PM ET on the 3rd Jan 2014. Immediately below we can see the current quote for the underlying which is trading at 0.89050.Next comes the quote window, and here you can see the binary option is trading at 63.00 on the bid if we want to sell and 69.00 on the offer if we want to buy. The two figures to the left and right (50 & 50) are simply displaying the latest bid and offer sizes to go through the market.Moving down the order ticket, the next selection is whether we want to buy or sell – the Direction. Click the arrow on the right to change the order from a buy to a sell.
If we buy we are agreeing with the proposition the market will close above 0.8875 by the expiry date and time. If we sell we are disagreeing with this statement. In this case we have selected a buy order as we believe the market will close above this strike price by expiry.Next comes the Order Type. All Nadex orders are Limit orders which I will explain shortly. There are no market orders on Nadex, just Limit orders. The GTC alongside stands for Good Till Cancelled and again I will explain this shortly.