In The Money Binary Option Strategy For NADEX Traders
As I was sitting here one day studying NADEX and pondering several ideas for trading I made a realization. It seems silly now thinking about it, I feel as though I should have noticed this trade sooner. Due to the nature of NADEX binary options and them having different strike prices it is possible to buy or sell options that are already in-the-money (or out-of-the-money for short positions). Think about it, buying a binary options that is already in-the-money. That means you are buying profit. Instant returns, all you have to do is wait for expiration.
In most instances in-the-money NADEX options don’t have much profit margin left. They are exchange traded binary options so when the market thinks an option is going to close in or out-of-the-money its traded value usually goes to $100 or $0 (or close enough to not matter). This should make sense; the options are binary and are only worth $0 or $100 at expiration so when an option is in or out of the money it should be worth $0 or $100. However, due to market conditions there are times when deep in-the-money options can be bought at a discount and provide near instantaneous profits. Similarly, there are also times when deep out-of-the-money options can be sold for the same near instant return.
What Are NADEX Binary Options?
I want to back up here for a step to make sure we’re all on the same page. What is a binary option and what is a NADEX binary option. A binary option is an option that has only two possible values at expiration, all or nothing. In the case of European style binary options this usually means a fixed return in the range of 70-80% for profitable trades and a return of 0-15% in the case of losing trades.European and other off-shore binary options are not tradable and can not be sold prior to expiration.
NADEX options are tradable, unlike European style options, and have prices that fluctuate between $0 and $100 depending on the price of the underlying. At expiration the options are binary in nature, worth $0 for losers and $100 for winners. The price of the option is between $0 and $100 and changes with the price of the underlying asset. Typically, when an the price of an underlying asset rises above the strike price of the corresponding NADEX option the price of that option will go to $100 or close enough to not make a difference.
- Click Here – For more on NADEX binary options and the differences between trading NADEX and European style binary options.
What I realized is that there are times when you can sell options with an instant, or nearly instant return. What I mean is that is sometimes possible to buy a NADEX binary option when the underlying asset is above the strike price at a price low enough to allow for an attractive profit. The same is true for short NADEX positions. It is possible from time to time to sell an option at a price that allows for some “guaranteed” profit. In practice this is actually two different trading strategies; the Bull In-The-Money NADEX Strategy and the Bear Out-Of-The-Money NADEX Strategy. In this article I will outline the basics of each technique and then go into more detail in later posts.
- Buying a NADEX binary option that is in the money means that it is already above/higher than the strike price. The option does not have to move in order to be profitable, it already is. An added bonus is the protection you gain from buying in the money options. The underlying asset actually has room to move counter to your trade before it reaches the break even point, much less creates a loss.
The Bull In The Money NADEX Strategy
The In-the-money NADEX strategy is a lower risk, conservative strategy aimed at bringing consistent returns. This strategy works particularly well with support/resistance lines, trend lines, Fibonacci Retracements and any other point of support you may find in a bull market. This can also be used to trade the bottom of trading ranges and bounces/bottoms in bear markets. The point is to try and find an asset that is trading near a likely area of support or price level that your analysis tells you the asset is not going to move below. This can be in any time frame, long or short. The very best support lines are ones that are confirmed in more than one time frame and with more than one indicator.
The next step is to scour the available options on the NADEX platform. Look at strikes that are below the current price of the asset and below your identified level of support. I like to stick with the closest expiration available but sometimes move out to the next available which gives a range of 1-5 hours till expiry. For the most part you will find options with values at or near $100 but there may be one with a price of $90 or less. These are the options I like to target.
At face value the risk/reward ratio is on the low side. You are looking at making 11-17%. For most binary options traders this is way to low. It’s lower than the 80% return you get with European style options and it’s lower than the return you would expect to get trading a more aggressive NADEX strategy. The point of this strategy is that the 11-17% return you can expect with this strategy is almost free money. It’s money left on the table by other traders and all you have to do is pick it up. The Bull In-The-Money Strategy is a conservative, low risk strategy with consistent returns comparable to combination strategies found in equity options trading.
How To Use Bull The In The Money NADEX Strategy
- The first step is to identify a potential area of support. I like to use trend lines, 30 and 150 day EMA’s, Fibonacci Retracement, stochastic and MACD histogram for my technical analysis. I also like to use a 3 time frame approach. First I analyze the long term trends and areas of support/resistance on charts of weekly prices. I draw these lines all in one color for easy reference. The long term trend is not as important as the near trend in this strategy, it’s the areas of support and resistance we are looking for here.
- Next I move down to charts of daily prices. If any of my lines drawn on the weekly charts are present here they are my most likely areas of support. I also look at the daily price action to see if any shorter term areas of support are present and then draw those lines in a different color. This chart is where trend is most important. If the near term trend is up then you can continue with the bull strategy and play off of support. If the trend is down then you will need to switch to the bear strategy and make your trade based on resistance.
- To take a signal move down to charts of hourly or even 30 minute bars. Wait for price to move down to your closest support line. Wait for it to find support and begin to bounce. At this time look at the option chains, look at strikes that are in the money, preferably below your closest support line. Strikes should have expiry no later than the end of the current day but shorter is better. If the option is less than $90 (returns greater than $10 or 11%) then I consider it to be a good trade. It is possible to make returns greater than 20% using this method but on average I am getting in the 10-15% range.
The Bear Out-Of-The-Money Strategy
The bear out-of-the-money strategy is just like the bull strategy but in reverse. When the near term trend is down you can play this strategy from resistance. The first two steps are exactly the same. The difference is which side of the option you are positioning yourself on. For the bear strategy you are selling short positions so you need to target options that are out-of-the-money and above the closest area of resistance.
- To take a bear signal move down to the charts of hourly or 30 minute bars. Wait for price to move up to resistance and begin to stall or reverse. Look to the option chain for an option with a strike above the current price of the underlying and above the closest resistance line. If I can find one with an expiration of one day or less that sells for more than $10 I consider it a good trade. I tend to get better returns using the bear version of the strategy but that is not always the case.