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How To Calculate Profit And Loss On A Nadex Binary Option Contract

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How To Calculate Profit And Loss On A Nadex Binary Option Contract

Nadex binaries are unique in that you can open or close all Nadex binaries before expiration.

But like other binaries, Nadex binaries can be held until expiration and will settle either in the money or out of the money. In addition, they do not just offer one at the market binary per expiration but offer binaries at multiple strike levels for each expiration.

These choices provide many opportunities for traders to take advantage of contracts available throughout the day and week. At the same time, it can confuse newcomers to Nadex binary options.

Related: Binary Options Trading Volume On Nadex On Track To Grow 400 Percent In 2014

To take advantage of these trading opportunities, it is important for a trader to be able to easily understand and calculate the profit and loss on a Nadex binary.

How is profit or loss calculated if the binary is closed before expiration?

First, remember a simple rule. You want to sell higher than you buy. If you sell to enter, you want to buy back lower than you sold. In the end, the rule is simple: buy low, sell high.

If you buy at $30 and sell at $60, then you will make $30. If you buy at $30 and sell at $15, you will lose $15.

If you sell at $70 and buy back at $40, you will make $30. If you sell at $70 and buy back at $85, you will lose $15.

How is profit or loss calculated if the binary is held to expiration?

A binary must expire in the money to be profitable. What does in the money (ITM) mean?

If you buy the binary, the settlement price of the underlying market at the expiration time must be greater than the strike that was bought.

For example, if you bought the US Tech 100(NQ) > 3620 @ 4:15 PM on 4/21/2014, then what does it take for it to settle in the money? By buying the binary, you're stating that this statement will be true at expiration, that NQ will be > 3620 at 4:15 PM ET.

The US Tech 100 follows the NQ CME NASDAQ 100 Emini Futures. The settlement price is calculated by taking the last 25 trades right before expiration and the average of the middle 15 of those 25 trades to reach the settlement price. In this case, since the binary expires at 4:15 PM ET, the settlement would look at the last 25 trades on NQ and average the middle 15 trade prices right before 4:15 PM ET.

So, if the settlement price was 3636 as of 4:15 PM ET on 4/21/2014, then you would be profitable on the trade. The settlement price (3636) is greater than the binary strike you bought which was 3620.

At settlement, since you were in the money, you would receive an email stating your payout is $100 per binary contract. Payout and profit are different. On Nadex all trades are fully collateralized. So, if you put up $50 to buy the binary and you received a payout of $100, then your profit would be $50.

If NQ had settled at or below your strike when you bought, then you would lose the $50 you put up to place the trade and there would be no further debit from your account.

If you sell the binary, the settlement price of the underlying market at the expiration time must be less than OR equal to the strike that was sold.

For example, if you sold the US Tech 100(NQ) > 3620 @ 4:15 PM on 4/21/2014, then what does it take for it to settle in the money? Since you sold the binary, you're saying the statement is false. That NQ will be < or = 3620 @ 4:15 PM ET.

So, if the settlement price was 3615 as of 4:15 PM ET on 4/21/2014, then you would be profitable on the trade. The settlement price (3615) is less than or equal to the binary strike you bought which was 3620.

At settlement since you were in the money, you would receive an email stating your payout is $100 per binary contract. Payout and profit are different. On Nadex all trades are fully collateralized. So if you put up $50 to sell the binary and you received a payout of $100 then your profit would be $50.

If NQ had settled above your strike when you sold, then you would lose the $50 you put up to place the trade and there would be no further debit from your account.

To simplify the process of calculating profit and loss, you can use the free live data binary scanner available at ApexInvesting.com. It will show you the profit and loss on a binary contract and the risk and reward as of expiration. It can also show you a simulation based on a move in the market to a specific price at that moment.

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To view an enlarged image of the binary scanner follow this link HERE

What about fees?

Fees are an important part of trading. On Nadex there are no broker commissions. There is one simple fee for placing a trade. The cost is $0.90 a contract for entry and $0.90 a contract for exit. The fees are capped at 10 contracts.

This is a huge advantage over other option contracts and many other types of trading. Even if you trade 10 contracts in a single order, your fee will be $9.00. If you place 100 contracts in the same order without changing the price, the exchange fee will still only be $9.00.

The contracts may be partially filled or filled all at once. As long as you don't edit the order, you will not be billed additional fees to place the trade on subsequent fills of the original order past 10 contracts.

If the trade expires out of the money with no value, then there is no fee at settlement. If the trade expires in the money, then the fees are the same as if you had exited before expiration. The fees are $0.90 a contract for settlement and the fees again are capped at 10 contracts for a maximum of $9.00 for a single position on the same contract at settlement.

They keep things simple! The above examples do not include fees since the fee gets smaller as you exceed 10 contracts because the fee is capped at $9.00 for 10 or more contracts on a single order.

(This information is current as of 4/3/2014. Check Nadex.com for the current fee structure.)

But what about the broker who said he didn't Charge fees to trade binaries?

Some over-the-counter binary bucket shop brokers will claim they have no fees. However, they only pay out $70 or $80 on a 50/50 probability trade. On a 50/50 probability trade, the Profit/Loss should be 1:1 less bid/ask spread and fees. So if you can only make $70 on a $100 risk, then the fee or spread in essence is $30, whether you are profitable or not.

Nadex has in the money trades with higher probability and out of the money trades with higher payout as well as at the money trades. In addition, Nadex is a fully regulated exchange making its income through simple exchange fees like any other exchange.

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

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