How To Understand The Simple Risk Versus Reward Values On Nadex Binary Options
Nadex Binary Options, Risk and Reward
Figuring risk and reward for a Nadex Binary Option is really quite simple. A binary option has a range of 0 (the floor) to 100 (the ceiling). They can never go below 0 or above 100. There are 100 points possible, and each point is worth $1.00, making every contract worth $100 total. This applies whether it is an equity index, a commodity contract or currency contract.
Every contract is fully collateralized; collateral is the maximum risk on the trade. When buying a binary, the purchaser puts up the amount to cover from 0 to the buy price. That amount is the total risk. Should the binary go up in value, the amount it goes up to 100 is the profit. When selling a binary, the seller does the opposite. When selling a binary, the seller puts up the amount to cover from the sell price to 100. That amount is the total risk. Should the binary go down in value, the amount it declines by is the profit.
The image below shows a Nadex ticket open in the direction to buy. The right side of the ticket shows the offer price or price available to buy. The left side of the ticket shows the bid price or price available to sell. In this case, this binary contract AUD/JPY >.95.75 (3PM), the price available to buy it is $72.00, and that is the total risk or maximum loss.
Buying the contract means that the buyer wants the contract to be greater than 95.75 at 3PM expiration. To sellback this contract for a profit, the bid side, left side or sell side would have to increase in value past $72.00. The Max Profit/Loss is viewable in the lower portion of the ticket. In this case, everything over $72.00 would be profit up to the $100 ceiling.
The below Nadex ticket shows a sell ticket. The offer price, left side or sell side shows the price to sell which is also the max profit. The difference between 100 and the sell price is the max loss or total risk. Again, the max profit and max loss can be seen in the lower portion of the ticket. As the bid price, right side, buy price go down below $65.00, the amount it goes down would be the profit until it reaches the floor of 0. If it declines to 0, the seller would make the max profit of $65.00.
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