Nadex's Tim McDermott And Dan Cook Discuss The Benefits Of Binary Options
"Binary options are really a straightforward, limited risk financial contract that is based on a simple yes-or-no proposition," McDermott told Benzinga. "There is one of two possible outcomes for the trader holding the position: all or nothing."
"One of the big struggles that traders have, and you hear this all the time, is managing risk," added Dan Cook, Nadex's Director of Business Development. "But they don't really know what that risk is, particularly in leveraged markets. With binary options, and even with a spread contract, I know what that full risk is up front."
Cook said that this takes away a lot of the "psychological aspect" and gives investors "time to be right."
"[Binary options] have a fair amount of volatility as the markets are proceeding," said McDermott. "The price at which the contract is being traded at -- at any given time -- suggests the probability that that contract will close in the money. So if it's trading at a price of $40, that suggests that the market thinks there's a 40 percent probability that the contract will end in the money. If it's trading at $75, there's a 75 percent probability."
Built-In Floor And Ceiling Levels
During PreMarket Prep, Cook took a moment to discuss and define the built-in floor and ceiling levels.
"If I was looking at an oil contract, you might have oil trading at $95," he said. "I might have a range of $95 to $100 -- $95 being the floor. So if I'm long at $95 / $50, that's 50 ticks, $50 risk, that's what I put up to secure that contract, with a maximum reward of up to $100.
"If the market is trading near $100 and I have that same floor and ceiling, I could sell near the $100 level and limit my risk without having to worry about putting a stop in and being stopped out."
When asked if novices could trade binary options, McDermott said that that is the "beauty of these types of contracts."
"They're very well-suited for inexperienced traders, as well as experienced traders," McDermott explained. "The reason I say that is because, for inexperienced traders, these contracts are limited risk contracts. They're fully collateralized. By that I mean, up front the trader -- the participants of any particular trade -- have placed with the exchange an amount sufficient to cover any possible loss they might have on the position.
"So they go into the trade knowing that they've put up as much as they're gonna risk on the contract, and they're never gonna get a margin call for additional money, and they're certainly never gonna get a physical delivery of some car load of cattle or something else they don't want."
Check out the video below for a recap of this morning's interview:
Disclosure: At the time of this writing, Louis Bedigian had no position in the equities mentioned in this report.
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