NADEX binary options aren’t like EU style spot binary, you can actually sell them and get paid. Read on to find out how you can use these simple sell strategies.
How To Sell NADEX Binary Options
NADEX, the North American Derivatives Exchange, is the leading source of regulated binary options in the US. One of the biggest differences between NADEX and spot style EU binary options is the way in which positions are opened, specifically how you enter a bearish position. With spot binary if you think the asset price will go down you buy a put from the broker, if the asset goes down you make money. At NADEX, because it is an exchange and you aren’t trading with the broker but with other traders, there are no calls or puts. You buy if you are bullish and you sell to open a bearish position, which in effect is the opposite side of someone else trade, someone who bought that strike to open a bullish position.
This is how it works. Let’s first remember that NADEX options are sold in lots, option strikes are preset with some in the money and some out of the money, and that all options are worth either $0 or $100 at expiration. During the life of the option, the time between when it first becomes available to trade and expiration time, the price will fluctuate between $0 and $100 depending on strike and the movement of the underlying asset. In the case of a bullish position, a position in which you bought the strike in the belief that prices will move higher, your profit will be the difference between the price you pay for the position and the amount you are returned at expiry, either $0 or $100. If the option expires out of the money and you get $0 you suffer a loss, the cost of the position. If the option expires in the money you get $100 and suffer a profit, $100 minus the cost of the option. If the option was purchased when at the money it probably cost about $50 and returned about $50, or 100%.
So, in the case of a bearish position instead of buying the strike you sell it. This means that you receive a credit for the position. That’s right, a credit. You get paid to open the position but beware, it’s not all wine and roses from here on out. As the seller of an option you become responsible to the buyer, if his option closes in the money you are required to pay the $100 but that is not your loss. Remember, ATM money options cost about $50 per lot. If you sell one for $50 and it closes in the money you a have to pay out $100, which is $50 of your money and $50 you received in option premium. If the option closes out of the money, which is what you want, you get to keep the premium (the owner of the option holds a worthless contract, you are required to pay nothing) and profit that amount.
- Buying At NADEX/Bullish Position – you buy the option strike, paying the ask price, and profit the difference between the cost of the option and $100. Your risk is the price of the option.
- Selling At NADEX/Bearish Position – you sell the option strike, receiving the bid price, and profit that amount if the option closes out of the money. Your risk is the difference between what you receive and $100.
Simple Sell Strategies For NADEX Binary Options
The mechanics of buying and selling options at NADEX opens up quite a few possibilities. The simplest and perhaps most effective for directional binary options trades are hedging strategies. Hedging is when you use one position to offset the cost of another, or to help maximize profits before expiry. Think about this. You take a signal on a bullish trade and buy an ATM the option for $50. The underlying asset moves up to your next resistance target and stalls out but you are able to sell the next higher strike for $50 at the same time. This means that your total cost is now $0 dollars, all you have to do is wait until expiry. If the asset remains between the two strikes great, you make maximum return, if not you lose nothing.
More advanced traders can target non-directional strategies using sold options. These strategies work best in ranging markets, when asset prices are trending lower or when they are capped by resistance. One method is to target out of the money strikes that can be sold for a credit with a high likelihood of closing out of the money. Take for example this trade set up for the S&P 500. Prices are trending lower in the near term with two strike prices close enough to the money to have value, but far enough out to be fairly safe relative to price action. Please take note, these are already in the money so there is no need for ANY price movement. Sell these for a combined credit of $31.50, free and clear and all you have to do is hold them for 5 minutes.
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