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How to Trade NADEX 20-Minute Binary Options

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Thomas has been interested in trading since Oct 5th, 2005. He has been following binary options since 2011 and trading NADEX since 2013.

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Binary options have been sweeping the globe ever since the CFTC made allowances for them to be traded in the US. The thing to take note of is that most of what you will find when searching online is not what the CFTC intended; their goal was a regulated, registered, and accountable method through which US citizens and other traders with access to the US market could trade binary options.

What they did was create an environment of confusion in which fraud, scams, and outright theft were able to flourish alongside legitimate trading venues. To this day, despite the many hundreds of "binary options brokers," there are still only three places to trade true, legal, and regulated US binary options and only one place, really, for the average retail trader.

What Is NADEX?

NADEX is the North American Derivatives Exchange and the only binary options trading regulated and safe for US traders. The company is located in Chicago at 311 South Whacker Drive, phone number 1-877-776-2339. The biggest difference between NADEX and what I will call the "offshore" brokers is that NADEX is an exchange. It is a business in operation for the purpose of connecting two traders together.

Offshore Trading vs NADEX

When you buy or sell at NADEX, you are doing so with another trader. The offshore-style brokers operate like the bucket shops of old. When you make a trade, you are actually making a bet with the house with odds, very much like a casino. When you lose, they win; when you win, they lose.

What this means for traders is a conflict of interest. There is a huge conflict of interest when using a financial institution that makes its money when you lose; they have no reason to see you succeed. NADEX has no conflict because they do not ever make money on your losses, only on the traffic of buyers and sellers using the platform. In that sense, they have a vested interest in your success. The longer you are able to stay actively trading, the more money they will make.

What Are Binary Options ?

Binary options are often advertised as an easier way to trade, but this does not make them easier to trade successfully. They are a highly speculative trading vehicle used for capturing short-term movements in an underlying market.

Binary Options Are Not Investments

Notice that I said speculative trading vehicle. I put it that way to be clear about one thing: binary options are very risky and are not to be considered investments. The life of the trade is very short, and it is possible to lose the entire investment or account in one trade.

So, a binary option is a trade on the movement of an underlying asset in which there are only two possible outcomes; max profit or max loss. If you think the price of the asset (currency, index, or commodity) will go up, you buy the option. If you think the price of the asset will go down, you sell the option, and if the asset price does as you expect, you make a profit. If it doesn't, then you lose.

How to Trade Binary Options With NADEX

Michael Hodge's step-by-step guide for trading binary options lists a number of strike prices and expiry times for each asset that you can choose from. This list is called the ladder. The strikes are sold in lots and referred to as "options," "binaries," or "binary options." The strike price closest to the price of the underlying asset is called "at the money." Those below the asset price are "in the money", and those above are "out of the money."

The options will all pay out $100 at expiry if they close in the money. The difference between the max payout, $100, and the price you pay is your profit. As a point of reference, the at-the-money strike usually costs $50 and pays $50 ($100-$50) in profit at expiration. In-the-money strikes will cost more because they have a better chance of closing profitably; out-of-the-money strikes will cost less because they have a lower chance of closing profitably.

The list of NADEX strike prices is called the ladder. Familiarity with the ladder board is the key to success.

The list of NADEX strike prices is called the ladder. Familiarity with the ladder board is the key to success.

NADEX 20-Minute Binary Options

There are a number of different expiry times to choose from, each having its own list of option strike prices. For the purposes of this article, I will focus on the 20-minute expiry, but these techniques can be used with any expiry NADEX has to offer. They also have five-minute expiry, which is OK, but I think a little short for effective trading.

Besides, these options can be bought and sold at any time, so if the position or trade you want to make becomes profitable in five minutes or five seconds, you can cash out. This is another huge advantage over the off-shore style, where options usually have to be held until expiration.

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Note: At this time, there are only four indices with a 20-minute expiry and only four assets with five-minute expiry but trust me—that is enough. The indices are the four major U.S. indices of which I choose the S&P 500 as the top choice, listed on the NADEX platform as the U.S. 500.

What Is a 20-Minute Expiry?

20-minute expiry means that each option exists for only 20 minutes. Unlike off-shore style binary options, which would last for 20 minutes after the time of purchase, NADEX 20-minute options start and stop every 20 minutes; that is, every 20 minutes, a new option with a full list of strikes becomes available, and 20 minutes later it expires.

During the life of the option, you can open and close a position at any time you want. If you open one immediately, it will have very near to 20 minutes until expiry; if you wait 10 minutes to open a position, the option will have 10 minutes left until expiry.

20 minute binaries are listed by strike for a number of major stock indices.

20 minute binaries are listed by strike for a number of major stock indices.

Buying and Selling at NADEX Binary Options Exchange

Another aspect of trading NADEX that can be off-putting to new traders is the buy/sell nature of the options. I've already discussed how these options can be bought and sold at any time during the life of the option, but this concept is deeper even than that. NADEX options are bought and sold to open and bought and sold to close, depending on how you want to position yourself.

This is different from offshore EU-style options in two ways. First, offshore style options are only bought. If you are bullish, you buy a call; if you are bearish, you buy a put. The second is that in both cases, you give money to the broker in hopes of a payout; this is not true at NADEX.

In order to facilitate the exchange nature of NADEX, the ability of traders to buy and sell with each other, NADEX options are traded in lots. If you are bullish and think that the asset price will close above a set strike, you buy to open. This opens a long, or bullish, position similar to owning a call. You pay the asking price and profit when the option expires and yields the max payout. If you want to close your long position before expiry, you will have to sell to close.

The confusion comes in when traders want to open a bearish position. When trading a lot, if you are bearish, you will sell to open. This means that you sell a position to another trader, receiving a credit for the BID price, the price at which they were willing to buy, and get to keep that credit if the option strike expires out of the money. If you want to close your short, or put, position, you will need to buy to close.

Risk is the final factor to understand. When you are buying calls and puts at an offshore broker, your risk is always the amount you pay for the option. At NADEX, when you buy to open, your risk is what you pay for the option; if it closes out-of-the-money, then you could lose it all, but when you sell to open, your risk is much different.

If the option you sell happens to close in-the-money, you are responsible for paying the max return of $100 to the trader who bought the option. This does not mean your risk is $100 because you received a credit; in the end, your risk is the max payout minus the credit you received.

A Trade Example Using the 20-Minute Expiry

In this example, I use the 20-minute expiry and am looking to open a trade as soon as the next 20-minute expiry becomes available so that the trade will take the full 20 minutes. It is possible to wait and enter the trade at any time, at any strike, up to and until the option expires. In this case, the asset being traded is the S&P 500, known as the U.S. 500 on the NADEX platform, and it has been trending sideways on the two-minute chart.

Asset price is holding near 2200, a level that could be supported. The closest strike is the 2200.25, what we will call at-the-money, and is trading for just over $50. I will use a limit order to buy to open one lot at $50 to try and get a good fill price. If the option closes above my strike, and I get a fill, then I will profit $50, or 100%.

Note: I like to trade off the charts provided on the platform. They are adjustable, include common trading tools and list the available strikes to the right of the screen. To trade, simply click the strike you want to buy or sell, and an order box will pop up.

Use limit orders to get the best fill prices.

Use limit orders to get the best fill prices.

Closing the Trade at a Profit

Soon after opening, the above trade asset price pulled back below the strike I was targeting, allowing me to get an entry of $50. After a few minutes of consolidation, the index bounced back and made a strong move to the upside, putting my strike firmly in the money and showing a nice profit. I chose to sell early, at $94.50, for a net return of 89.5%. Asset price remained at the new highs until expiry so if I had held it, I would have made the full return.


The Cost of Trading at NADEX

There is, of course, a cost; NADEX is a business, after all. The good news, and something I hit on earlier, is that NADEX does not make money when you lose. That is, you are not betting with the house as you do with a casino and like you do with the offshore style brokers. NADEX charges a small fee, $0.90 per lot, for each lot that you buy and sell.

If you buy to open and sell to close one lot, you will incur a charge of $1.80. If you buy to open and hold to expiry and the strike closes in-the-money, it will cost you $1.80 as well, but if the option expires out-of-the-money, there is no charge to close. There is a limit to how much you can be charged, and that is $9.00 per trade or 10 lots.

This article is accurate and true to the best of the author’s knowledge. Content is for informational or entertainment purposes only and does not substitute for personal counsel or professional advice in business, financial, legal, or technical matters.

© 2016 TMHughes


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