A Simple Way to Understand Trading Nadex Binary Options

 

Football season is finally happening, at least for some colleges. And in this example, you're at a sports bar watching Navy play Air Force. 

You're rooting for Navy, and your buddy sitting next to you went to the Air Force Academy.

After a little bit of friendly smack talk, you decide to place a wager on the game. Both teams are evenly ranked by the oddsmakers.  Each of you places $50 on the bar. If Navy wins, then you're right, and you pick up the $100 on the bar. If Air Force wins, your buddy picks up the money, and you collect nothing.

That's exactly how Nadex Binary Options works.

You have an opinion about where price will finish, relative to a price level and a fixed period of time. For example, your statement could be:

The US 500 Index will finish ABOVE the 3504 Price Level when the market closes today at 4:15pm ET.

Using the football analogy above, you decided to put up $50, which is deducted from you trading account. For this trade to be accepted, someone needs to take the other side of the trade for $50.

If the market closes a hair above 3504 at 4:15, you collect $100*
If the market closes at or below 3504 at 4:15, you collect $0*

With Nadex Binary Options, every contract must add up to $100 to be an active trade:

• If your maximum risk is $40, then the person on the other side of the trade is risking $60
• If your maximum risk is $55, then the person on the other side of the trade is risking $45
• etc., etc.

IMPORTANT NOTE: YOU ARE NOT MARRIED TO THE TRADE

In most cases, you can exit a trade if you want to lock in a sure profit, or to minimize losses if a trade starts moving against you.

How does Nadex make their money? Nadex makes money by charging an exchange fee of $1.00 per contract, per side to facilitate trades.

In this trade example, the US 500 Market had been on an extended daily uptrend, closing at 3503. The belief was that the trend would continue on it's upward grind, as it has done the past 9 out of 10 days. The closest daily strike price was 3504. The decision was to to go long from 3504, risking $50 to make $50. and the order was filled.

TRADE RESULTS

The US 500 Closed at 3496, below the 3504 strike price. Although there were plenty of opportunities to exit this trade for a partial profit, I opted to stay on the side of the uptrend and let the trade ride. 

Payout $0, for a $50/contract loss.

A Simple Way to Follow a Trend with Nadex

 

Since the Covid-19 Market Selloff in the Spring of 2020, the US Equity Indices have made a steady, rebound. Looking at the charts, the uptrend shows that roughly 7 out of 10 trading days are bullish, compared to the previous day.

Let's take a look at the emini Nasdaq (/NQ) Daily Chart.

This chart is grinding steadily upward, riding above the 3 EMA, the T-Line (8 EMA) and the 50 and 200 day Simple Moving Averages. With this kind of uptrend, you just want to stay long until the market closes below the T-Line.

Here's a simple, set-it-and-forget-it  way to trade this uptrend with Nadex. The simple proposition is that the /NQ will close tomorrow ABOVE today's close.

1. Record the previous day's close. In this example it was 11636
2. At 6pm ET, when Nadex opens, find the Daily Expiry (4:15pm) strike price nearest the previous close. In this case, the strike price was 11632
3. Place a Limit/GTC Order to BUY the US Tech 100 (Sep) Index  >11632 for $50 per contract.
4. Select the number of contracts you wish to trade. For any trade I make, I like to be as close to 2% account risk per trade. This is a demo account with a $16,000 balance. 2 percent is $300, so 6 contracts were purchased.
5. Maximum Risk is $300 on this trade. Maximum reward is also $300 (less exchange fees).
6. Place the Limit order and wait for it to fill.

Let's see how this trade is playing out:

• The Limit Order was placed at 6PM ET Monday Evening
• The Limit Order filled at 7:15am Tuesday Morning.
• After taking some heat at the Opening Bell, the trade moved up sharply.
• With 4 hours, 51 min. remaining in this trade, it is up $168 out of a maximum $300 available.

I'm going to let this trade run until expiration. All it has to do is finish 1 tick above 11632 to collect the maximum profit of $300 and to confirm the resumption of the bullish uptrend.

If the NQ settles at or below 11632, then I collect $0, and I forfeit the $300 I put up as risk money to secure the trade. It will be a small 2%  loss against a trend where the odds were on my side.

Trade Conclusion

This trade took a little bit of heat in the morning, but took off in the afternoon settling at 11726, well above the 11632 strike price. Maximum profit of $300 was collected (less exchange fees), for a 100% return on capital risked.

August 3-7 Markets Continue to Climb

Trading Out of the Money Binary Options

The markets were tumultuous last week, but managed to remain resilient.

S&P 500 futures opened positive Monday above the T-Line (8 EMA), continuing its push upward. Until there's a close below the T-Line, investor sentiment remains bullish.

Click on Chart to Enlarge

With this information in mind it was time to take a look at Nadex for a bullish binary options strike price.

Shortly after the Opening Bell the /ES (S&P Futures - Sep) was trading at 3284. The nearest strike price with a Daily Expiration (4:15PM ET) was > 3293

So Here was the Proposition I was Trading:

"The US 500 Index will settle above 3293 by 4:15 PM ET Today when the market closes"

This is called an Out-of-the Money Binary Option. When I placed this trade, the market was at 3284, the marketplace of buyers and sellers determined that there was about a 30% chance that price would rise above the 3293 price level by 4:15 PM. 

My rationale behind the trade was that the market would continue to grind North for the day, and not reverse course. With $30 maximum risk per contract, I bought 5 contracts.

Trade Details:

Number of Contracts Purchased: 5
Maximum Risk per Contract*: $30   $150 total
Maximum Reward per Contract*: $70   $350 total

* prices do not include exchange fees

Click Chart to Enlarge

With Nadex Binary Options, every contract is equalized at $100. If, I'm assuming $30 risk for my out-of-the-money trade, then the person on the other side of the trade is putting up $70 risk in the belief that I will be wrong.

When the trade filled, the maximum risk ($150) is withdrawn from my account. The person on the other side of the trade put up $350, making the pot even at $500.

At 4:15 PM when the market closes, then there are only 2 possible outcomes:

1. I am right. The market closed above 3293, and I collect $500 (less exchange fees), or
2. I am wrong. The market closed at or below 3293, and I collect $0

Important Note: I am not married to this trade.

At any time, I can choose to exit the trade if I want to lock in a sure profit. I can also exit the trade if I feel the market is moving against my trade plan to minimize losses.

Trade Results

Click Chart to Enlarge

With an hour and a half until expiry, this contract was flashing $152 in available profit vs. $150 risked. The 3293 price level was holding up as resistance and the S&P 500 was up over 30 points on the day. Stochastics were overbought.

In these volatile markets, any end-of-day profit taking or a sell-off would take the shine off of a nice profit. Trade closed for 100% profit vs. capital risked.

What Happened at the 4:15 PM Expiry?

Just after I took the $152 profit, the market started selling off. It dove down to 3282, before trying to make a brief rally back. If this trade had been held until expiry, the payout would have been $0 and I would have last the $150 I put up as risk capital to make the trade.

Try Nadex Today, Risk-Free

What I like about Nadex the most is that every trade has capped risk that is known in advance before you place your trade. That's huge in these days of extreme market volatility. It's impossible for a trade to run away from you. No margin calls.

If you're curious about trading with Nadex, download their free demo here. Your account will be funded with $10,000 in play money and you can practice trading with defined risk.

You can fund a Nadex account for as little as $250. Nadex is available for traders in 41 countries.