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.