Options Pros Talk Put-Call Parity and More This rebroadcast of OICs webinar panel on Put-Call Parity...
Intro to Binary Options
08/20/2012 10:24 am EST
Binary options are a relatively new trading instrument. Darrell Martin shares how binary options work and how they can help you make profitable trades.
We are talking today with Darrell Martin, who is here to talk about binary options on Nadex. So first of all, Darrell, what is a binary option?
Okay, binary option; you think about binary, zero, and one. Okay, it's a true/false statement. So in a binary option, you're saying gold is going to be greater than $16.50 at the close of market today, or it's going to be less than or equal to $16.50. Okay, that would be a binary option.
So you can go in and you can put the trade on, and one big thing is that not all binary options are created equally. Okay, if I go out and want one of the over-the-counter foreign binary option companies, and you're going to look at them, they're going to pay you maybe like $80, if you put up $100 risk and you're right. Okay, obviously, they're making $20 if you win and they're making $100 if you lose
Well, on the binary options on Nadex, you can go in and you could put in $50 to make $50, but you can also put in $5 to make $95. So if you put in $5 and you make $95, that's a 1900% return on one trade, and they have trades literally that start every two hours on the binary options. They have trades that go 22 hours. They have trades that go weekly. So you could put a trade in on Monday morning at 3 am or 4 am, and you could hold it all the way until Friday.
What's the typical size of a binary option?
The binary option is literally up to you. You can go in and you can do one. So if you have $100 in your account, you've got twenty trades if you're doing $5 binaries that you could actually place. Actually, with $1, there are trades on there with $1 and $2. You can actually place trades. So you can go in and you can buy 100 of them, 1,000 of them. What if you go in there and you buy 100 binary options at $1, and it actually is a profitable trade-that's 99 times 100, and a $9,900 profit you just made.
This sounds like the perfect opportunity for somebody who has a smaller account, that maybe can't trade regular futures contracts, and wants to try this anyway.
Yeah, I mean if you're brand new, this is a really fun way to trade and it's really fun. Even if you're an experienced trader, there are ways to use it in advanced methods. But you can know nothing about the market, except for I think it's going to go up or going to go down, and you can use binary to trade it.
So how are these different from other binary-options contracts offered out there?
Okay, the big difference-the number one difference, is you are trading binaries with Nadex on an exchange. If you trade them like overseas; one, if something happens to that company, what does that mean? Is it stable? Is it a reputable company? Yes or no. And two, is they're not the market maker. Nadex is the exchange, and so Nadex itself is making you anonymous to the market maker. So they don't know actually if you're winning or losing. If you're getting in or getting out.
Whereas, if you're trading with an over-the-counter broker out there that's in the Virgin Islands or something like that, and you're putting a trade on, a lot of them, they're trading against you so that they have a vested interest to tilt it in their favor.
The biggest difference after trading on the exchange is the payouts. I've looked at a lot of different companies out there, and they're like $80 to $1, $90 to $1, or $70 to $1. Well, you can make $1900 to $1. So you can look at just insane returns on the binaries. So actually, there is more profit potential. There is more opportunity with that profit, and you get to be anonymous versus having somebody trading against you and knowing who you are.
Finally, where do I go to find out more information about this?
Okay, to find out more about binary options, what you do is go to Nadex.com. They have some basic information on the site. I would highly recommend to sign up for an account, top-right corner. It only costs $100 to open an account. Actually, it doesn't even cost you $100. It's a $100 deposit to open an account. So you can have very little money and get trading right away. It takes literally two to three minutes to open an account. Nadex.com.
Darrell, thanks for your time.You bet. Thank you.
Related Articles on OPTIONS
OIC instructor Bill Ryan joins host Joe Burgoyne in a discussion about protection strategies. Then, ...
This rebroadcast of OIC's webinar panel discussion covers why implied volatility levels drive option...
I always find it fascinating to see what kind of big trades are being made in the options markets. S...