How Being Out of the Money Can Bring You Lots of Money When Using Binaries
Out of the Money, (OTM) binaries have a special advantage over their siblings, the At the Money (ATM) and especially the In the Money (ITM) binary. With the right priced OTM binary, you don’t need a stop loss!
That’s right, of course you always first consider if the risk of the binary is within your limits, but if the amount to put up for the binary is low enough, there is no need for a stop loss. That means putting your trade on, planning your take profit exit point (which you can exit at any time trading Nadex!), and then moving on to look for more great trades.
In this series, we have covered binaries being ATM and ITM. Here we will go over the advantages and disadvantages of binaries OTM, and the best time to trade them.
For those who don’t know, a binary is an option. When you trade it you are essentially answering the true or false statement of the binary. For example, take this Nadex binary EUR/USD >1.3606 12PM. If you were going to buy it, you would be saying this statement is true.
The underlying market EUR/USD will be ABOVE or greater than, the Nadex binary strike price 1.3606, at the expiration time 12PM. If you were going to sell it, you would be saying this statement is false. The underlying market will be AT or BELOW the strike price 1.3606 at expiration time 12PM.
Nadex binaries are worth $100. You can buy or sell them and your entry price is between $1 and $99. When you buy the binary, the entry price is your total possible risk, and the amount you put up for the trade.
The difference between $100 and your entry is your total possible profit. If you sell the binary, then it’s the inverse: the difference between $100 and your entry is your total risk, and the amount you put up for the trade.
Your entry price is your total possible profit. When the binary is settled, you receive back what you put up for the trade, plus or minus your profit or loss.
Binary Entry Price = Total Possible Risk = Amount Put Up for Trade
$100 – Binary Entry Price = Total Possible Profit
Settlement = Amount Put Up for Trade +/- Profit or Loss
$100 – Binary Entry Price = Total Possible Risk = Amount Put Up for Trade
Binary Entry Price = Total Possible Profit
Settlement = Amount Put Up for Trade +/- Profit or Loss
With Nadex, the great advantage is you can exit to take profit at any time; you don’t have to wait until expiration. In fact, as we demonstrated in a previous article, to profit over time with Nadex binaries, it’s necessary to exit and take profit.
When the binary is priced at or around $50, then the underlying market is right at the strike price of the binary. Using the example above, if EUR/USD were priced at or around $50, then it would be considered ATM. At that price, it shows there is a 50/50 chance that the market could go up or down at that point, and therefore, the probability of it expiring profitable or ITM is 50%.
Now, as the underlying market moves in the direction of your trade (up if you are long or down if you are short), the amount you put up to enter the binary trade becomes more expensive or higher and the binary then is considered ITM. There is a higher probability at that point, that your trade will expire ITM. ITM would be at $100 if you are long or 0 if you are short.
You should ask yourself, “If the underlying market were on the other side of the binary’s strike price, from the direction you were to take the trade, shouldn’t the risk to trade the binary be somewhere under $45 or less?”
The probability of an OTM binary expiring profitable at expiration is low. It has so much farther to move to expire profitably, compared to an ATM or an ITM binary. That is its disadvantage. So, yes, the amount to put up or risk for the OTM binary will also be low. Hence, its name Out of the Money. An OTM option has no intrinsic value, only extrinsic or time value.
This brings us to the biggest advantages of an OTM binary: because of the low amount to put up for entry, and with low enough risk, it means you don’t need a stop loss. There is no worry then, about having to manage risk once the trade is placed. An OTM binary also has lots of possibility to profit, even more than an ATM or ITM binary!
If you bought your binary for $12, that’s your low risk, and it gives you $88 of possible profit! If you sold your binary for $88, then, again your risk is only $12 and your possible profit is also $88. You will, however, need your OTM binary to move in order to make profit. The time to look for an OTM binary is when you find a market with momentum, volume and trend. Then, be sure to know where you want to take profit, before entering. Referencing the above binary that was sold for $88, and you know that a binary is around $50 when it is ATM, then, you can plan to take profit then around $47, for a $41 profit.
If you would like to learn more on how to trade OTM, ATM and ITM binaries, go to www.apexinvesting.com, a service provided by Darrell Martin. Apex Investing Institute offers free education, and free access to the Nadex Binary and Spread Scanner Analyzers. Member traders are invited to trade in the rooms, take advantage of trade signal services, have key indicators and access the Apex Forum. The forum content is updated daily and includes over 7000 members. In a supportive learning community of seasoned as well as up and coming traders, traders of all levels learn how to trade Nadex binaries and spreads in depth, as well as futures, forex, stock and options, and gain an edge for successful trading overall.
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