Moneyness in Binary Options
At-the-money (ATM) is when the strike price is the same as the underlying market price.
In-the-money (ITM) is when the underlying market is greater than the strike price. This happens when a trader is buying the position when the trader is opening a position to sell, the option is in-the-money when the underlying market is less than strike price.
Out-of-the-money (OTM) This happens when a trader is opening to buy and the underlying market is less than the strike price. Same thing when a trader is opening a position to sell and the underlying market is greater than the strike price.
Deep-out-of-the-money & Deep-in-the-money these are the outer strike price ladders. A way to define the deepness from a price point of view is when the spot price is a 10% probability for out-of-the-money and 90% in-the-money.
Near-the-money is yet another way to describe a relation between the binary option strike price and its moneyness. When the strike price is approximately at-the-money,the price will be around $50 per unit due to the fact that the market interprets an ATM strike price as having an equal probability of going up or down. It can become a good habit to scan the actual binary strike price ask prices that are near $50, as a quick measure to check where the underlying market is at, without using a chart.
Strike Price and the Underlying Market Price – what is the relation?
Strike price is the price target a trader expects the price will hit at expiration time: at the target, above the target or below the target. It is worth noticing that there can be up to 14 strike prices listed by the Nadex Exchange for each underlying contract. When you have several strike prices to track, they are called a ladder.
The underlying market for Nadex binary strike prices are, excluding currency pairs, the near-term futures contracts. To explain: A trader wanting to put on a position on gold would be monitoring both the gold spot market as well as the gold future that is tracking on the Commodity Exchange, Inc (Comex). The Nadex binary underlying markets are futures contracts. The spot and futures contracts track each other closely, and the binary option needs to be understood as being on the future contract.
Currency Pairs
Nadex offers trading on the following Currency Pairs: USD/JPY, USD/CAD, USD/CHF, EUR/USD, GBP/USD, EUR/JPY, GBP/JPY & AUD/USD. Currency pairs differ from the other binary options contracts since the weekly binary currency options are in fact the spot currency market. The currency trading takes place from Monday morning 3 a.m. EST to 3 p.m. EST Friday. It is a very volatile market compared to other markets and the result of these ever changing price patterns makes it a great way for traders taking positions on out-of-the-money binary option trades.
Moneyness & Trader Direction
When you buy a binary option the relationship between moneyness and the underlying market is as following:
If the buyer is taking a long position and thereby expecting the market to go up he will profit when he get in-the-money. The opposite position is different for the seller. Selling and being in-the-money should be seen as the spot price falls through the floor. When selling a binary option the relationship between moneyness and the underlying market is as following: [table “4” not found /]
The premium for selling is ($100-bid) Example: When the bid price is $90 for a binary option strike price, it means that the binary option strike price is deep-in-the-money for buyers but deep out-of-the-money for sellers.
The market estimate there is an 90% probability of the spot price staying above the binary but only 10% probability of the spot price falling below the binary. The challenge for traders is to know when to go with the crowd a make a small profit and when to go against the market for a big score. The market changes and reacts to new information. In reality, the status that is paramount is value at settlement time. When dealing with binary options we only have two outcomes: $100 per unit or $0 per unit.
Risk Management
A binary option trade is not necessarily a set-and-let decision. A set-and-let strategy is where you take a position and when you watch the screen for a minute, hour, day or week. During this period, you do not trade. It does not involve managing the trade. The shorter the time frame is, the less use and need there is for managing a trade.
Market Changes
When trading binary options it is crucial to have an idea of which direction the market is going. If you are trading binary options over the course of days or weeks, a set-and-let strategy might not prove to be the most beneficial.
As time goes by, you might learn new information or get a feel for the market and take a new position on the same trade. Trading has a lot to do with timing. When certain market criteria are met, you can justify to re-enter a trade with a new position.
This can reduce risks if implemented correctly and even make you take several correct positions on the same trade during the same time period. Risk management only applies in long term binary option tradings and requires a minimum og one hour time frame up to a day or a week.
We have seen 60 seconds trading getting more and more popular online, but in the said trade risk management strategies they are not applicable. We do not recommend buying 1 minute options since they tend to be nothing more than a gamble.