Thomas has been interested in trading since Oct 5th, 2005. He has been following binary options since 2011 and trading NADEX since 2013.
Four Steps To Trading NADEX Binary Options
There are four basic steps to trading NADEX binary options. It is very easy once you become familiar with the platform.
- Pick your underlying: NADEX offers about three dozen assets based on the major issues traded today. This isn't as much as what a European style broker will offer but no big deal. All the major indices are included as well as eight currency pairs, seven commodities, and two economic events.
- Pick your expiry: NADEX has expiries on an intraday, end of day, end of week and sometimes end of month basis. At this time you will have to pick your strike which is different from European style options. Euro-style binary options only have one strike, the price of the underlying at the time of purchase. NADEX binary options are listed with multiple strikes whose prices fluctuate with the price of the underlying. The price you pay is the current market price as listed.
- Pick buy or sell: This is a major difference from European style. With Euro-style binary options, you buy a call when you are bullish and a put when you are bearish. NADEX binary options trade in a fashion akin to futures and spot forex. When you are bullish you buy the option and when you are bearish you sell it. Buying is fairly self-explanatory; when you are bullish on an option you buy. Selling takes a little getting used to. When you sell a binary option you receive the bid price. This a credit position in which you risking $100 minus that amount. There is more info on that later on.
- Pick trade size: With European style binary options, your trade size is whatever amount you choose between the broker's minimum and maximum trade. NADEX options are different. In this respect, they are akin to equity options. Each option is based on a lot of 100 shares. Each share is priced between $0.00 and $1.00 making each option worth 100 x the option price. An option that is priced at $0.35 costs $35 dollars to buy and receives $35 if sold. Minimum trade size is one lot, to make a bigger trade buy or sell as many lots as you would like, up to the maximum.
How NADEX Binary Options Are Priced
NADEX binary options are not priced in the same way as European style binary options. NADEX options are worth $0 or $100 at the time of expiration. If your option is in the money you receive $100 and if it is out of the money you receive $0. During the options life, its value will fluctuate along with the underlying asset. The price you pay is the spot price of the option at the time of purchase. Deep in the money options are usually worth close to $100 making them an attractive sell. Options far out of the money are usually worth far less. Some trade as low as $0.25 or lower. These are attractive options for those who prefer to buy and are expecting a big move.
- NADEX binary options are worth $0 or $100 at expiration. The price you pay is the spot price of the option, somewhere between $0 and $100. Your potential profit is $100 minus the amount you risk. If you buy an option for $65 and receive $100 at expiration you are risking $65 for a potential $35 (53.8%) profit. If you sell an option and receive $65 in credit you are risking $35 for a potential 185.7% profit.
NADEX Binary Options
Pick an Underlying
The first step is one of the easiest to make, pick an underlying. I suggest picking one of the major indices, one forex pair, and one commodity to keep on your watch list.
I trade the S&P 500 and find that it is enough to keep me busy. NADEX options have different names but they are all based on the underlying asset The S&P 500 is called the US 500, the DAX is called the German 30 and etc.
- NADEX has all the major indices represented. You can trade the S&P 500, the Dow, the NASDAQ, the DAX, the Nikkei, and several others.
- NADEX has eight major forex pairs. Forex trading opens at 6 pm eastern time every Sunday giving early access to international forex markets for U.S. binary options traders.
- NADEX has seven commonly traded commodities. Gold, oil, silver, corn, and others.
- NADEX has binary options on two economic events. Traders can speculate on the releases of weekly initial jobless claims or on the monthly release of the Fed Funds Rater.
- NADEX has options on Bitcoin with others in the works.
NADEX Has Multiple Strikes for Each Expiry
The picture below shows a listing for all the expiries for the US 500 (S&P 500) at 3 pm on the given day. You can see that this asset has strikes set in $2 increments. strikes will be different for each asset and expiry.
Choosing the right strike is one of the hardest parts of trading NADEX, or any kind of options. Any could produce profits but not all will, and not all come with the same risk.
- NADEX intra-day options expire at set times periodically throughout the day. Expiries vary from asset to asset.
- NADEX daily binary options expire at the end of each trading day according to the representative market. Commodities are based on the U.S market where each is primarily traded. Equities at 4:15, some commodities and forex at 3 pm, Oil at 2 pm. Currencies trade just about around the clock though and have multiple expiries.
- NADEX weekly binary options expire at the end of the trading week. This would be Friday or the last business day of the week in the event of a holiday. The time of expiry is the same as if it were a daily.
Buy or Sell?
The next step is to choose to buy or sell. If you are bullish on an option, that means you think the underlying is going to close higher than the strike price, then you buy. If you think it isn't going to happen you sell.
Let's look back at the last picture. All the strikes for the S&P 500 options with 3 PM expiry are listed as US500> the strike price. If you are bullish and think the US500 is going to be >1535 at 3 PM then you buy. If you think there is no chance that the US500 going to be >1535 at 3 PM then you sell.
The picture below shows a NADEX order ticket. This is an order to buy a call at $33.50 with an end of day expiration and strike greater than 1545.
Selling NADEX binary options is a credit position. You receive the bid price and risk the difference between that credit and $100. Because all NADEX options are cash-secured you must maintain that amount in your account until expiration. Other than that there are no other margin requirements trading NADEX, anyone with an account and enough cash to cover the risk can sell NADEX options.
NADEX Order Screen For Binary Options
Pick Your Trade Size
As I described above NADEX binary options don't trade in quite the same way as European style options. NADEX options trade in lots and each lot represents 100 shares of stock. Prices are quoted on a per-share basis but options are purchased in lots. This means that an option priced at $0.47 really costs $47 to buy and will receive $53 if sold.
If you want to trade $500 dollars you must buy 10 lots of this option ($47x10=$470). If you are selling this option the same multiplier effect is applied to your risk and the amount of cash you will have to keep in your account.
NADEX Has Binary Options On Economic Events
One of the exotic instruments gaining popularity in the binary options world is economic events. These are option positions on whether or not something will happen. For example, NADEX offers binary options on two different events. These are the Fed Funds Rate and weekly Jobless Claims.
Traders can choose positions based on these figures. If the market expects the FOMC to raise the target overnight rate then traders can buy options reflecting that opinion. The same is true of jobless claims. Traders choose positions based on whether or not the weekly initial jobless claims figure will be greater than or equal a certain level. Multiple strikes are offered for both types of options.
The example below shows an order ticket selling initial jobless claims at 355,000. This is a bearish position on claims that expects the actual number to be less than 355,000.
NADEX Economic Events Binary Options
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.
© 2013 TMHughes
Yuval Perry from Israel on September 16, 2013:
learning this knowledge is very important. I think gain understanding of the price movement is the key for success. I use unique fibonacci level which obtain the reversal point from wave 2 to wave 3.
Devika Primić from Dubrovnik, Croatia on March 13, 2013:
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