Binary Option Basics in the U.S. (Nadex Binary Options)
A basic guide to understanding U.S. binary options
Binary options are popular because they are relatively easy to understand. Easy to understand doesn't mean easy profits though. Binary options are different in the U.S. than they are in the rest of the world. Most foreign binary options brokers won't open accounts for U.S. residents, meaning if you want to trade binary options in the U.S. you'll likely be trading "Nadex options." Nadex is the primary binary options exchange in the U.S. Here's a basic rundown of how U.S. binary options work.
Binary Options in the U.S. (Nadex)
A binary option on Nadex is a wager that the price of an asset will be above or below a specific price (called the "strike price") at the time the option expires.
"Will the price of gold be above $1550 [strike price] at 1:30 PM today [expiry]?"
If you think the answer is yes, you buy the option. If think the answer is no, you sell the option.
Binary options trading, based on this type of question, is available for stock indices, forex, commodities, news events and bitcoin, with various strike prices and expiry dates/times. This makes them suitable for day traders and swing traders.
The binary options are priced between $0 and $100. When the option expires it's worth either $0 or $100, depending on whether the underlying asset is above or below the strike price when the option expires. The price of the option is set by the buyers and sellers of the option contract, and represents the approximate odds of the price reaching $0 or $100.
For example, if the option is trading at $50, then traders view the odds of the option expiring at $0 or $100 as equal. If the option is trading at $20, traders view the odds of the option expiring at $0 as greater than expiring at $100. Your view may be same, or it may differ.
You can buy/sell an option at any time, at any price available, up until expiry.
You can also close your position at any time, at any price available, up until expiry. You can also hold the position until expiry, at which point the option will either be worth $0 (good if you sold options) or $100 (good if you bought options).
Nadex Binary Options - Maximum Profit and Loss
Profits and losses are created based on the difference between the price you buy or sell the option at, and the price it expires at.
- If you buy an option--expecting the price of the underlying asset to be above the strike price at expiry--your maximum risk is your purchase price minus $0. For example, if you buy an option at $55, your maximum risk is $55. Your maximum profit is $100 minus your purchase price. In this case, your maximum profit is $45.
- If you sell a Nadex binary option--expecting the price of the underlying asset to be below the strike price at expiry--your maximum risk is $100 minus your sale price. For example, if you sell an option at $35 your maximum risk is $65. Your maximum reward is your sale price minus $0; in this case $35.
Every dollar the option contract moves is worth $1 in profit or loss. You can buy or sell multiple options to increase or decrease your gain/loss. For example, if you buy three Nadex binary options at $40, your maximum risk is 3 X $40=$120 and your maximum gain is 3 X $60 = $180.
Try to keep your risk on each trade to a small percentage of account capital.
Figure 1 (click to enlarge) shows a binary options ticket, which gives all the information on what you are trading, as well as the current price of the option. Pick your trade direction and size (how many contracts) and the ticket calculates the maximum loss and profit for you.
Capital Required for Nadex Binary Options
Each trader is responsible for providing the capital to fund their trade. If you buy an option at $50, your maximum risk is $50. You need to have at least $50 in your account to fund the trade. The seller of the option, also risking $50, must also have at least $50 to fund the trade.
The minimum deposit required to open a Nadex account is $100, although no minimum trading balance is required once the account is open, since you can only open positions if you have enough capital.
Trading fees are $0.90 per option, up to a maximum fee of $9 per trade. Fees are charged to enter and exit positions (including holding till expiry). If you hold an option until expiry, and lose, you are not charged the exit fee.
Nadex offers a demo account where you can try binary options trading risk-free.
Final Word on Nadex Binary Options in the U.S.
If you want to trade binary options in the U.S., Nadex is the main place to do it. Nadex options differ from binary options traded elsewhere in the world. The structure is transparent and each option has a price, underlying asset and an expiry. At expiry the option is worth $0 or $100, creating a profit or loss for the traders involved. Holding the option until expiry isn't required. Buy, sell or close your options positions at any time up until expiry. You can open an account for as little $100, and there are no trading minimums except that you must have the capital available to cover the maximum risk on each trade you take.