How A Nadex Binary Is Impacted By Implied Volatility
Implied Volatility can impact the price of an option more than any other factor.
Implied Volatility is a fancy word for an expected move. The longer there is until expiration, the more time there is for the market to move. This is why a binary will be worth more the longer there is until expiration.
In addition, "implied volatility" increases the premium cost of the binary as a large move is expected to take place. For example, before the FOMC or NFP Report, with two hours until expiration, a binaries premium will be closer to $50 than it would be at midnight, when no news is expected within the next two hours and when expected movement is normally low.
If you bought an OTM binary strike both above and below the market several hours before a news event, you may see both sides be profitable, even though the market has not moved and time has passed. This is due to the expected movement flooding into the options market and causing the premium to rise.
Understanding how implied volatility impacts the price of a binary option, by time and by pending government news events, can help a trader know whether they should pay or collect premium to take advantage of the rise or fall in the implied volatility impacting the binary's price.
A simple illustration can be seen in the same phenomenon on stock options before an earnings release. The implied volatility gets sucked out of the binary after the release has happened. Even more premium is removed when there is little movement after a large expected move. This is known as a volatility crush.
Notice the highlighted example below, that shows how the implied volatility for options on AAPL rose before the earnings announcement. There was a large expected move when the earnings announcement caused the demand for the options to rise and the price that traders were willing to pay.
Then, after the earnings announcement happened, whether there was a big move or not in the price of the market, the implied volatility dropped -- causing a dramatic decrease in the premium built into the option.
View Implied Volatility Chart Of AAPL HERE
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