This is a follow up post to a post I did back on May 27, 2012 on the European binary options which is what I was trading at the time. Here is a link to that post. http://slopeofhope.com/2012/05/binary-options-market-sniper.html . Since then, I also started trading binaries on the NADEX (North American Derivatives Exchange) and have shut down my trading of binaries through European binary brokers. The counter party risk in continuing to trade through European brokers I feel is unacceptable. Unfortunately, at this time, you must be a resident of the United States to trade on the NADEX.NADEX options are structured with strike prices. The first thing you will need to do is to set aside your normal option terminology and thinking as to "puts" and "calls" as those do not exist with NADEX. You will either buy a strike when you believe the price will move and/or close above that strike or you will sell that strike should you believe price will move and/or close below that strike. So the binary statement is either true or false. The statement is false if it settles out of the money and true if settled in the money. Unlike the European binaries, you are NOT locked into the trade as there is an active two-way market. You can close out or scale out of positions at any time by putting in an opposite trade to the open position you have.
Normally, there is around a $3 to $4 spread between the bid and the offer. All options settle at either $0 (zero) if false (out of the money) or at $100 if true (in the money). When you enter a trade, the bid/offer price you buy/sell is subtracted immediately from your account. Should the trade settle true (in the money), $100 per contract is then added back into your account. When you buy a strike, your risk is what you paid. When you sell a strike, your risk is the difference between the bid and $100. Example: you sell the strike for $45. Your risk in the trade should price be above your strike at close is the difference between the $45 and $100=$55 risk.
Commissions for executed trades are $.90 (ninety cents) per contract. You are not charged commission should your trade be false (out of the money). But here is the kicker! There is a maximum commission of $9.00 per trade! Trade 10 for $9 or 250 for $9!!! This went into effect the day after Labor Day. You can open an account with as little as $100. When you first open an account, you can go up to $250 by "insta-check" and start trading immediately. They will even give you a paper trading account for up to two weeks when you sign up with them.
I thought I would give you a peek at trading this to see how it can work. Here is what I did on Thursday, September 20, 2012. Early in the morning, I did my pivot analysis and determined that major support on the ES (December contract) was 1440-1442. The major resistance was 1452-1456. Early in the regular session (not GLOBEX) price traded at support so I bought the 1443 ES strike (they are in increments of 3 points or "handles") for $41.50. Risk in the trade is your premium paid or $41.50. Maximum you can make on the trade is $58.50.
Remember, if your trade settles true, maximum you can make is $100 less whatever you paid for the option. As price moved higher and got to the bottom of what I had already decided was resistance, I sold the 1452 strike for $47. In this trade, my risk was $53. Price continued to advance and what I was looking at lead me to then believe that the 1452 strike would most likely settle true (which means I would be out of the money) and I was in a losing trade.
I therefore bought the 1452 strike (remember I sold that strike. Buying that strike closes the trade) for $65 for a $18 per contract loss on that trade. Price reached the top of resistance late in the day and I sold the 1455 strike for $51. Settlement was between the 1443 strike that I bought early in the day and below the 1455 strike that I sold late in the day. Both trades ended true (in the money). Though you can trade these with a "set it and forget it" trading plan, I tend to manage my binary trades more tightly.
Conclusion: IF you have a proven trading methodology, binary option trading may be for you. Some may view this vehicle is gambling. IF you are not trading with positive expectancy, then, yes, you would be gambling as would be the case for any "trading" of any vehicle. What I really like about this is the small amount of money to get involved. I have found that out of small acorns, mighty oak trees can grow. Here is the link for NADEX http://www.nadex.com/ If you have any questions, I can be reached at Dutch302 at gmail.
Yours in the never ending search for more trading edges, The Market Sniper