Regulated Binary Options Trading in the US
Online gambling was banned in the United States a few years ago. The trading of binary options via online platforms of ‘foreign’ companies is regarded somewhat as a form of online gambling and is therefore outlawed.
As such, the Commodities and Futures Trading Commission (CFTC) decided to license a few companies who would provide exchange-traded binary options as a viable alternative, and this was how two companies emerged to take over the landscape in that jurisdiction.
These binary options exchanges are:
- North American Derivative Exchange (NADEX), owned by the IG Group.
- Cantor Exchange, owned by Cantor Futures Exchange, LP.
These two companies are the online licensed exchange operators for the trading of binary options in the United States. The purpose of this article is therefore to give you some insight as to the workings of these two exchanges.
NADEX
Nadex is regulated in the United States by the Commodities and Futures Trading Commission (CFTC) to provide a regulated exchange where buyers and sellers of binary options contracts can congregate to trade without the interference of a broker’s dealing desk. As a member of NADEX therefore, you can trade directly on the exchange as a participant in the retail end of the market. Traders on NADEX have access to contracts on a range of assets provided directly. Traders can also get their funds held in segregated accounts within the US.
NADEX only caters to traders located within the US and US citizens. NADEX will provide a two-week access to a demo account to all real account holders. It takes a minimum of $100 to open an account on NADEX. Deposits and withdrawals are done by ACH checks, wire transfers and paper checks.
NADEX Contracts
Trading on NADEX is based on lots and not investment amount as is the case in online-traded binary options. A fee of 90 cents per lot is charged for trade entries and exits, and is capped at a maximum of $9. This means that a trader trading 20 lots pays the same fees as a trader who trades 10 lots. No fees are charged on trades that end up out of the money.
How is a NADEX contract structured? A Nadex binary contract is a simple TRUE or FALSE statement that bets on the listed contract specifications. For instance, a typical Nadex contract with a 2-hour expiry will be stated as follows:
Gold (Dec) > 1794.0 (12noon to 2PM)
The trader must then do one of two things:
- If you believe that gold will rise about the strike price of 1794.0, you BUY the contract.
- If you believe that gold will fall below the strike price of 1794, you SELL the contract.
You will be offered a price (offer price), and the number of contracts you would like to purchase, as well as the dollar value of each pip movement for the asset.
Let us assume that the gold ends higher than 1794. How is the profit calculated? Usually profitable trades settle at 100, and losing trades settle at 0. The profit is therefore calculated by subtracting the offer price (i.e. opening price) for the asset (which for this example is taken to be at 21) from the settlement price of 100, which gives us a result of 79.
You then multiply this result by the number of contracts purchased and the dollar value of each pip. So assuming the trader purchases 20 contracts at $1 per point, then the profit for the trade will be 79 X 20 X 1 = $1,580.
If the trade settled at a loss, then the trader’s loss will be restricted to the amount invested in the trade, which is the difference between the offer price (21) and the settlement price (0) multiplied by the number of contracts and the dollar value per pip (1). This gives us
(21 – 0) X 20 contracts X $1 = $420
The Catch: The catch here is that usually the offer price is set about ten minutes before the trade commences, so you have to be very careful in your analysis to make sure that the price does not experience significant movement within this time frame. Another strategy is to use a Pending Order at your chosen price. This comes in handy when trading breakouts.
CANTOR EXCHANGE
Cantor Exchange is about three years old in the business. Like NADEX, they charge a commission of 90 cents per trade entry and 90 cents on in-the-money outcomes. They also go ahead to provide a mobile trading app for your iPhone, iPad or Android device, as well as a free no-obligation practice trading account. Unlike NADEX, Cantor Exchange also accepts non-US traders, although the conditions for their account opening and account operation are different.
Trading on Cantor Exchange largely follows the NADEX pattern of buying or selling on the spreads. Cantor Exchange also maintains an online trading portal for its demo and real account users. Cantor Exchange is regulated by the Commodities and Futures Trading Commission (CFTC) and traders can open accounts with as little as $100.
Cantor Exchange’s trading hours are between Sunday 5:30 PM ET until Friday 4:00 PM ET, with a break occurring between the hours of 4:00 PM ET and 5:30 PM ET on any exchange trading day.
Conclusion
So here we have two regulated exchanges in the US, with one catering to US clients exclusively while the other accepts nationals of other countries. Most of our articles have been based on the contracts traded on these two exchanges, so it is only fair that you are provided with some information about the trading conditions on these exchanges to guide you.
