Binary Risk and Reward: Not All Are Created Equal

Binaries are becoming a big buzz word in the trading community lately.

However, many traders have experienced or heard from other traders of the horror stories associated with trading non-US CFTC or SEC regulated binaries and do not understand that not all binaries are created equally. Many of them have not even heard of Nadex and have been lured into opening accounts or have false perceptions about binaries as a whole. 

 

Binaries Are Not All Created Equally!
Consider the statement: "All stocks are bad to trade," but this statement could be coming from someone who bought pink sheet stocks from Jordan Belfort, recently highlighted in "The Wolf on Wall Street" movie. They are not taking into consideration the vast differences between pink sheet stocks and exchange listed large cap stocks. So the opinion is skewed based on a lack of knowledge or experience in the various types of stocks. The same can be said for binaries. 

 

International binary brokers post messages of 80% returns, which sounds great, until you look at that math and the reality that the international binary broker is often trading against you, creating an obvious conflict of interest.

The international broker will allow you to place a simple buy or sell binary contract where, if the market expires above the price at time of entry, you profit on a buy, or if you sell, the market expires below the price at time of entry, you profit. Note, with many international brokers, you have a push if the market expires at the same price, so you simply get your money returned. This may sound okay, but in reality, what you are doing is simply placing a 50/50 trade. And with the "push" it is less than 50/50. Why is it 50/50 or less? Because no matter the system, even if it profits say 70% of the time, there is a 50/50 chance on each trade that it will land in the 70% winning bucket or the 30% losing bucket. 

 

Now, taking the math a step further, you will find that if you have just a 50% winning ratio, meaning you where right half the time, then you will, in fact, lose money.

For example, if you had 5 winning trades that made $80 a piece on a $100 initial risk, then you made $400. If you also have 5 losing trades that lost $100, then you lost $500, resulting in a net loss of $100 over 10 trades, even though you were correct just as much as you where wrong. If the payouts are lower than 80%, then the net result is even worse.  So, you have to have a much better than 50% winning ratio to even start to net out an acceptable profit. To make it even more difficult, most international binaries do not allow anyone to close their positions before expiration, so you have to literally be right about direction and price as of a certain time.

A Different Way To Trade Binaries

 

However, there is a different way to trade binaries. You can trade binary price ladders with fixed expirations on a regulated exchange. 

The exchange is called NADEX (North American Derivatives Exchange). It is in Chicago and is regulated by the CFTC. They do not trade against you. You trade against other traders and market makers. They do not know if you are entering or exiting. They also don't know if you are winning or losing on a trade that you are exiting from.This allows you to get transparency in pricing while maintaining anonymity from the trader or market maker on the opposite side of the trade. 

 

Nadex price ladder binaries let you trade at the market (ATM) binaries. But they also let you trade in the market (ITM) binaries where if the market stays flat, moves in your favor, or against you slightly, you can still profit. The profit is lower, but the probability of profit is higher. On the other hand, you can trade out of the market (OTM) binaries where the market must move in your favor, but your returns can be substantially greater. You can even combine ITM binaries for range bound strategies like iron condors and butterflies. And you can combine OTM binaries breakout strategies like strangles and straddles.

Example of a real 1000% profit binary trade
 

One example is a trade from Friday, February 14, 2014 as displayed below. On this trade, there was a long buy signal on the ESH4 (ES 03-14) (S&P 500 Emini) chart (You can apply whatever strategy you would like for signals). The selected correlated market is US 500. An OTM strike was chosen based on a pivot deviation level and based on how far the market still had room to move based on the expected range in that hour. 

 

 

The average risk was $6.40 per contract. Doing 10 contracts, that made the risk $64.00. For simplicity, I have grouped the orders together on this specific example to show all the submitted and filled orders below. The risk will never increase and the market can move against you, and you will not be stopped out. You have up until 2 PM to close the trade earlier for a profit/breakeven/loss or can hold it to expiration.

 

 

 

 

 You could have closed the trade early, as the binary rose in price or held it to expiration for the maximum return. The market expired above the binary strike of 1835.2 at the expiration time of 2 PM. With the settlement value of 1835.25, the payout was $1,000 on the initial $64 of risk. After subtracting the risk of $64 and the fees, the net profit was $918 on the trade. (Fees are .90 per contract per side with a cap of $10 dollars per order, no matter how large the size of the single order and no fee upon settlement, if the binary expires out of the money). This trade from entry to expiration resulted in a net profit of 1,120% on risk and fees. Below is the settlement email from the live trade that was placed on the Nadex exchange.

 

 

 

Summary, Probabilities, and Correct Expectations

 

This is, of course, not to say one should expect to always, or even often, make maximum profit or even be profitable for that matter. Obviously, no trader should expect to make these returns on a consistent basis. But at such a large payout, one could lose more often than they are profitable and still potentially net a profit.  This is something that could not be done on standard ATM non-US regulated binaries. There are a variety of methods and strategies that can be used when trading Nadex binaries and spreads. The benefits available allow a trader to use the US regulated, high probability and/or high profitability Nadex binary price ladders so you can better control risk and reward payouts in line with probabilities.

 

Learn More About Trading Binaries

 

To see examples of trading on Nadex binaries and spreads, see these articles posted on Benzinga, click here.

On Nadex, the markets are open from as early as 6:00 pm ET to as late as 5:00 pm the next day, giving the ability to trade day and/or night on intraday, daily and weekly contracts. If you would like to learn more about trading Nadex binaries, check out this 16 video course, absolutely for free, on Marketfy.