Trading binary options: strategies and tactics by Cofnas Abe

Trading binary options: strategies and tactics by Cofnas Abe

Chapter 1
Key Features of Binary 
Option Types
This chapter covers the key features of a binary option contract available 
globally and in the United States. There are two basic types of binary option 
trades. The first is the laddered binary options offered at the Nadex Exchange, 
part of the IG Markets, the Cantor Exchange, the CBOE, the CBOT, and the 
NYSE binaries, also known as Byrds. The NYSE binaries launched in 2016 
and offer binaries on equities. The NYSE entry into binaries allows traders 
to trade weekly binaries on major equities. The CBOE offers binaries on the 
VIX and announced binaries on the China A50 index. These are potential 
game changers for traders who look to use binaries as part of their total trad-

ing toolbox.
Nadex and the Cantor Exchange are CFTC approved. Nadex is owned 
by IG Markets. The Cantor Exchange, owned by Cantor Fitzgerald, is a 
true exchange and does not make a market in the binaries. In other words, 
they don’t take the other side of a trade placed by a customer. Instead, 
liquidity is supplied by independent market makers. The second type of 
binary option trades is the non-laddered platform, simply offering the 
opportunity to bet on the whether the price will be higher or lower at 
expiration. These are not currently allowed in the United States, but are 
popular around the world.
Later in the chapter, I also discuss the four basic strategies of trading— 
at-the-money, in-the-money, out-of-the-money, and deep-in/out-the-money— 
as well as the role of the market maker in the process. The chapter will end 
with a sample bid/ask scenario.

Defining the Key Features
Let’s start by defining the features that shape most of the laddered binary 
option selection and trading. These terms will be used time and again 
throughout this book, so commit these definitions to memory. You’ll come 
to know them well.
Expiration date: The time that the option expires.
Settlement value: The value of the option on expiration. It will be $0 or 
a $100-fixed payout.
Underlying market price: This is the actual real-time market price of the 
underlying contract.
Contract: This is the basic unit of a trade of one lot. The value of a lot 
varies among firms. For example, one lot at Cantor is $1. One lot at 
Nadex is $100. At IG, 0.01 lots is $100.
Bid: The premium price that a trader receives for opening to sell a contract.
Buy: This refers to betting the underlying market will go up. A trader opens 
a trade and pays the ask price associated with a strike price. If the price 
settles above the strike price, then the trader wins the $100 ask price.
Sell: This refers to betting the underlying market will go down. A trader 
puts on an open sell order. The trader pays for an open sell order 
($100 – bid). It is $100 – (bid). This is equal to putting on a position, 
anticipating a decrease in the price of the underlying market. It is also 
the premium price that a trade pays for closing a position that was 
bought. The sell is also labeled as the put tab at the Cantor Exchange
Spread: The difference between the bid and the ask. With any new 
market, the spread will tend to be narrow as more volume increases.
Bid size/offer size: This is the number of positions being bought or sold. 
You will find that the bid and offer size is not useful as an indicator 
of sentiment.
Commission fee: The trader may pay a commission fee per transaction. 
Nadex charges $1 per transaction. Firms offering Nadex binaries 
may be offering different commissions.
Start time: At the Nadex, IG markets, and Cantor Exchanges, the start 
time for a binary trader is fixed at the beginning of an interval. A 
five-minute trade interval starts, for example, at 05:00 and ends at 
05:05. A trader can enter the trade before the expiration, but the 
time to expiration is not triggered by the entry. In other platforms 
(discussed later), a rolling start is featured. This means whenever the 
trader puts on a trade, the trade duration clock starts at that point 
and ends at the designated duration

Trading binary options: strategies and tactics by Cofnas Abe