How Traders Impact The Price Of A Nadex Binary

A Nadex binaries price is impacted by time until expiration, implied volatility, the strikes proximity to the underlying market and by traders themselves.

Traders Impact The Price

A Nadex binary contract is based on a black scholes model and its pricing will be based on this model adn the price will fluctuate regardless of trades being made on the option like any other option. However, like on other exchange traded options, on Nadex binaries you and other traders are free to place a bid or offer limit order inside the bid offer spread. This will cause the bid/offer spread to narrow and will change the price of the binary as displayed below.

Nadex Does Not Impact The Price

Nadex does not take the other side of trades they are an exchange like the CME, NYSE etc.. Nadex is there to facilitate as a facilitator of orders between buyers and sellers, to ensure transparency of pricing and liquidity, and to provide traders with anonymity so the other side of the trade does not know if you are getting in or out of the trade.

The Nadex Binary Ticket And Depth Of Market

In the live Nadex binary ticket below you can see several things: Contract Name, Month, Strike, Expiration Time, Risk/Reward, Bid/Offer Price & Size, and Depth of market.

At the top of the ticket you can see the contract terms. The US 500 (Jun) [Based on the CME's S&P 500 Emini Futures ESM4 contract] will be > 1856.5 at 4:15 PM on teh 28th of March 2014. You will also notice the the current Nadex Indicative Index of ESM4 is at 1861.350

If you believe the statement is true that ESM4 will be greater than 1856.5 by the expration time you can buy the binary. If you believe the statement is false, that ESM4 will be less than OR equal to 1856.5 by the expiration time you can sell the binary.  

It is imprtant to not miss the point that buy means true which is > than the strike and sell is false which means < or equal to the strike. There are no ties at expiration the settlement price of ESM4 is > than the strike or it is not.  if the settlment price of ESM4 is > than the strike then the binary it is in the money for someone who bought the binary (so they will receive full payout) and the seller will have not been profitable. If the settlment price of ESM4 is < or = the strike at expiration then it is in the money for someone who bought the binary so they will receveive full payout and the buyer will not have been profitable. 

BIG TIP: It is important to note that on Nadex a binary contract does not have to be held until expiration you can enter and exit before expiration.On the ticket you will notice that if quantity is entered the risk and max profit for the number of contracts is displayed in the bottom half of the ticket.  An astute binary trader will lock in their profits or limit their losses versus holding the binary option to expiration just like any vanilla call put option trader should do.

Visual Understanding Of the Impact Of Traders On The Binaries Price

However, the most important thing to note is how the binaries price is being impacted by other traders. 

The market maker is quoting a bid with the size of 500 contracts for 56. This means that the market maker is willing to buy from you, meaning you sell to him/her, 500 contracts this instant at that price. You can choose to trade 1 contract or all 500. You could place a trade for more but may have to get filled at a different price like on any market. If you take out all the contracts by the market maker at the prices listed then the market maker will refill the order book depth of market with another 500 contracts. As you can see there are also 50 contract availble for bid (sell price) at $55 and another trader is posting a bid at $35.00. This means other traders have placed a buy limit order to buy at this price so it is availble for you to be able to sell to them at the price listed for the quantity they have posted they are wanting to buy.

Notice on the offer (buy side-right side). There is an offer of $57 for 2 contracts. This means a trader is willing to sell 2 contracts to you to buy from them for the price of $57. Again you can trade 1 contract or all the contracts listed. Often a trader can get confused when they  see the binary price strike ladder and only see a offer size of 2 (See image below of live market Nadex binary option chain). They may think there are only 2 contract available. However, when the ticket is opened and the depth of the order book fo the contract is visible as displayed above the trader can see there is 1 contract availble at $60 and 500 contracts availble at $62 for them to buy (see opened ticket above). 

The traders offering the bid and offers inside the market makers bid offer prices may get filled by other traders or they may get filled by the market maker. They will definetely get filled by the market maker should the market move enough in their direction. 

To see examples of trading on Nadex binaries and spreads, see these articles posted on Benzinga, click here.

To learn more about how to trade binary options and for indepth binary trading strategies, tools and trade rooms see ApexInvesting.com