Where Did All The Premium Go?

The title of this article may be a question you have asked yourself at one time or another. You may have been in a trade with everything going well, when all of a sudden it seems that the bottom drops out. All premium is gone. At that point, you may blame the exchange you are trading with and start looking for a new, hopefully better one, that will protect your premium. It is not the exchange that needs to change. You will find the same thing everywhere.

There are market makers that provide some liquidity to the markets. However, these market makers have laws that govern their actions to ensure a fair and reasonable two-sided market. Without these regulations, trader’s profits would be swindled and binary prices would be more volatile than they are already.

The movement of premium is directly related to the movement of implied volatility (IV). Implied volatility is the expected movement built into the price of an option. You will see binaries go through cycles of high and low premium mirroring IV movements. It is how it works. If IV is going down, premium is also going to go down.

Shown below is an image of the VIX.

CBOE introduced the Volatility Index (VIX) in 1993. The VIX measures market “expectations of near-term volatility conveyed by S&P 500 stock index option prices.” By looking at the chart, you can see there is movement in the VIX.

This is the same as the delta of a call option. When trading binary options on Nadex, your price is going to be from 0 to 100. Implied volatility goes up the closer the binary price is to 50 and goes down the further it goes away from 50. As IV goes up and down, the price of the binary option is impacted. By learning to trade in all market conditions, you can use this volatility to your advantage.

CBOE’s website says, “Whatever your opinion - bullish, bearish or somewhere in-betweenish - VIX options and futures give you the opportunity to protect against, or capitalize on broad market volatility.”

To learn more about the VIX and other related VIX indicators, see Volatility Indexes: Introduction To A Series or Volatility Indexes: There Are More Out There Than Just The VIX.

By realizing the correlation between the premium and the volatility, you will be better prepared for trading. One mistake that traders often make is placing blame when they lose in a trade. If you can step back and analyze what actually happened with your trade without blaming the exchange, the market makers or anyone else, you will be further ahead in your trading experience. It is not the exchange that is taking the premium away. It is directly related to the volatility of the markets. If there was no movement, there would be no volatility, but there would also be no trading.

Apexinvesting.com offers free education to help you in your trading, a service of Darrell Martin.