In the Money? ITM Binaries and the Best Time To Trade Them
In a previous article, it was covered what an At The Money (ATM) binary is, it’s advantages and disadvantages, and when the best times are to trade it. In this article, we will cover what it means for a binary to be In the Money, (ITM) and the best time to trade an ITM binary. Learning and understanding the moneyness of binaries can help you better choose the right priced binary for your trading system. The better you understand the rules of your system, and more importantly, why they are the rules, the better you will choose the right binary for your trade.
When you trade a binary option you are answering a yes or no statement. For example, the binary US 500 (Sep) >1953.0 (4:15PM) is asking, “Will the underlying market Emini S&P 500 be above 1953.0 at 4:15PM?” If you buy the binary, you are saying “Yes, it will be”, and if you sell it you are saying, “No, its going to be at 1953.0 or below 1953.0 at 4:15PM.”
With an ITM binary, the underlying market is already above that strike. It’s already above 1953.0. Therefore, not only are you paying for time value, like an ATM binary has, you are also paying for intrinsic value. For example, if you bought a Nadex binary ITM for $70, it’s higher priced than an ATM binary which would be around $50. It’s higher priced, because the market is already above the strike and now has a higher probability that it will expire ITM. To give you an idea of what that $70 represents, the first $50 is time premium and the next $20 is the real value of the binary, or the intrinsic value. If it were only $50, it wouldn’t be an ITM binary; it would be an ATM binary worth around $50 of time value.
Your probability percentage goes up with ITM binaries.
Obviously, this is an advantage as it is already ITM so the market doesn’t have to move for the binary to become profitable. It can stay where it is, or even move against your trade slightly and still be profitable. The only thing needed to profit is time decay or time to go by, and for the underlying market to remain ITM, above the strike, or to continue to move up in your favor. ITM binary option prices typically move slower; slower to your profit target but also slower moving should it go against your trade, which makes managing risk less challenging than an ATM priced binary.
You can control that risk with exiting early at any time to manage loss. This is possible with Nadex binaries which is unlike any international binary brokers where it’s not possible to exit early.
Nadex allows you to enter and exit at any time as long as there is a buyer or seller for the other side. Nadex binaries are worth $100. You can see on the buy and sell trade tickets below, when buying, the ask or offer amount (right side of the trade ticket) is what you pay to enter the trade and that is your total possible risk. The difference between your entry price and $100 is your total possible profit.
When you sell, the bid amount (left side) for the binary becomes your possible profit, and the difference between $100 and the bid price is your total possible loss as well as the amount you pay to enter the trade. On the Apex Binary Scanner, you can see that same strike with the profit and loss possibilities. The market has moved a little since the screenshots of the tickets, but with the binary scanner you are able to easily compare all of the binaries for that expiration and their possible risk/reward.
To view image click HERE
If the advantage of being ITM is higher probability, then the disadvantage is the higher price that comes with it. With the higher price, the profit potential becomes more limited. However, you should be taking profits anyway.
In addition, since it’s already ITM, typically price will move slower, thereby moving slower to your profit target. Paying more to enter the trade means you take on more total risk than an ATM or an Out of the Money, (OTM) binary. As mentioned before though, you can exit at any time and limit this risk, making the payout more than reasonable with Nadex.
You can learn how to not take a full loss, using the Apex Binary Scanner and other tools provided by Apex Investing. That way you can still keep your risk reward ratio to a 1:1.
For example, if you buy an ITM binary for $70 and you have a take profit set for $25, taking profit when the price reaches $95, you also need an exit strategy, in case the price moves against you. Since you know the price will be around $50 when the underlying reaches the strike, you can plan to exit if the Nadex indicative reaches the strike.
Then you are exiting at or close to $50 with around a $20 loss. That’s giving you a trade with a 70% probability of expiring ITM, and you still have a 1:1 risk reward ratio or a little better than 1:1! All this is possible with Nadex binaries and utilizing some of Apex Investing’s tools.
Going back to really knowing and understanding the “why” of your rules for your strategy, consider what you anticipate the market is going to do. If you are buying or selling a binary and you think the market has made its expected move, and there isn’t too much time left to decay until expiration, then an ITM binary would be a good choice.
It’s higher probability already being ITM, there isn’t a whole lot of time left for the market to move, but you won’t need it to; your binary is already ITM.
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.
The following article is from one of our external contributors. It does not represent the opinion of Benzinga and has not been edited.
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