In the first article of this four-part series, you learned how to use diagnostic bars with expected volume, and expected range channels to trade with only 15 minutes a day. Here in part 2, you will learn how to apply this system to make money on binaries using this system by making money on time.
How To Make Money On Time With Binary Options, With Nadex Binaries
Making money on time with an option is known as premium collection. You are, in fact, collecting the time value in the option.
A binary option has a value of $0 to $100. Nadex binary options have strike prices. If you buy a binary, the price you buy at is the risk, and $100 minus that price is the maximum profit potential. If you sell a binary option, the price you sell at is the profit potential, and that price subtracted from $100 is the risk. You can do one or hundreds of contracts at a time, depending on your account size and your risk management method.
Related: What Is A Nadex Binary Option?
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If you buy a binary option that has a strike price under the underlying market's price, then if the market stays flat, moves up or moves down, but still expires above the strike price as of expiration, you will be profitable on the trade.
You can also do the inverse. If you sell a binary option that has a strike price above the underlying market's price, then if the market stays flat, moves down or moves up but does not stay above your binary strike price as of expiration, you will be profitable on the trade.
If Doing A Buy Side Premium Collection Nadex Binary Option Trade, Follow This Example
1) The market (i.e. ES S&P 500 Emini Futures) is at 1835 at 9:45 a.m., and the system gives you a buy signal. ((A) Actual Volume exceeds expected volume in the last 15 minutes, (B) with an up close bar, (C) and the subsequent bar breaks that bar's high).
2) At 9:45 a.m. you buy a Nadex binary US 500 > 1833 @ 10:00 a.m. (meaning you are stating that The S&P 500 will be above 1832 as of expiration 15 minutes later.
You buy the binary for a cost of $70.00. Therefore, the risk is $70 and the profit potential is $30.
Why would you do a trade with that kind of risk-to-reward ratio? Probability is the main answer. Remember, the market is already above your strike. It can stay flat, it can move up, it can move down a lot and come back or just move down a little and you still will be profitable. The only scenario where the trade loses if held to expiration, is if it goes down multiple points and stays down in the next 15 minutes.
It is important to remember you do not have to hold the binary until expiration. This is a huge benefit of trading on Nadex. If the market moves up, you can exit when the binary hits the value of $95 for a @25 profit. Likewise, if the market came down to your strike at $1833 you could exit for $50 (less a few dollars on bid/ask spread say $47.).
This would allow you to have a risk of $23 and a profit of $25, giving you a much better risk-to-reward ratio. Now if the market stays flat, moves up or does not move down more than a few points in the next few minutes, you will be profitable on the trade. If it does move down, then you have a 1:1 risk/reward ratio on the trade but over a 70% probability on the trade (matching the price you purchased at $70 as 3/4 scenarios you will profit on the trade).
3) In this case, it expired at 1836.75 above your 1833 strike. Therefore, you are profitable on the trade at either $30 or $25 if you took profit before expiration which is always a wise plan.
You can see an example of this chart by clicking here. You will notice the three steps on the 10:00 a.m. expiration, less than 15 minutes before expiration: the entry, the strike, and the expiration price.
Used with permission from Apex Investing Institute LLC ApexInvesting.com
Also, you can do trend collection (make money on movement) with binaries for a much higher payout on this strategy, or you can combine the premium collection and trend collection together for what is known as a double binary. We will discuss applying these two additional binary strategies in follow-up articles.
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