Binary Options Strategy - Nadex & IG Markets

The binary options offered by Nadex and IG Markets have the advantage of a variable payout. Unlike fixed-payout binaries, conventional binary options range from low probability/high reward to high probability/low reward payouts.

The trader can choose their strike price, as long as the correponding contract is currently available. The price of a binary option is quoted between 0 and 100, reflecting the current probability that an option will finish in or out of the money.

While these options have some definite advantages over fixed-payouts, they are also a little more complicated to trade. There are two basic and widely accepted strategies for trading binary options. These are:

Trade Cheap

This is a low probability, low risk, high reward strategy. By buying options when the price is below 30, or selling when the price is above 70, you are getting the best risk to reward ratio. A binary option purchased at 30 can pay out over 200%, and a binary option bought at 15 can pay out over 500% at expiration!

Depending on the asset and the price you purchased it at, a move of 80-100 pips or more may be necessary for the option to expire in the money. You can lose more than half of the time and still make a profit with this strategy. But for this strategy to pay off, you must look for trends that are likely to finish in the money.

You also have the option of closing trades before expiration, and raking in a small profit if you are uncertain about whether the price will stay above the strike price until expiration. See the section below on trading binary options prior to expiration for more details.

If you prefer occasional large profits at the expense of frequent small losses, then this strategy may be appropriate for you.

Trade At Near Certanties

This is a high probability, high risk, low reward strategy. By buying options when the price is above 70, or selling when they are below 30, it is very likely that the option will finish in the money. At this point, the price is at least 25 points or more above the strike price. The downside to this strategy is the negative risk to reward ratio.

Remember that you are required to put up the full risk amount as premium for a trade. If you buy one lot at 70, then you must put up $70 to make a maximum profit of $30. If the option finishes out of the money, then you lose $70. With this strategy, it is necessary to win far more than you lose. A single maximum loss can take out several trades worth of profits.

If you are trading this strategy, keep a close eye on the underlying asset's price. If the price starts to fall below the option's strike price (i.e. the option price is moving below 50), then exit the trade. If you prefer to book small, regular profits and have the discipline to cut losses short, then this strategy may be appropriate for you.

Trading Binary Options Prior to Expiration

Conventional binary options can be exercised prior to expiration, so it is possible to trade them for short-term profits. Prices move rapidly between 30 and 70, and more slowly below 30 and above 70. If you're going to trade prior to expiration, make sure you place your initial buy trade above 30, and your initial sell trade below 70.

Binary options that are exercised before expiration are subject to the Bid/Offer spread. This is the difference between the Bid and the Offer price for a particular contract. The spread for a typical binary contract is 5-8 points, so this will reduce your profits accordingly, along with any trade and settlement fees.

Here's an example setup: Let's say you buy an option around 30, thinking it will go up and expire above the strike price. The price moves above 50, to a high of around 70 before it stalls and reverses. You decide that rather than risking the option expiring out of the money, you'll take your profits now. The Bid price is currently around 60, so you sell the option at that price.

Assuming that you've traded one lot, you've just made $30 with a total risk of $30. Of course, if you buy at a higher price, your risk will be higher. This strategy is a proactive way of bringing in modest short-term profits without the risk involved with buying high and waiting until expiration.