Features of a Binary Options Contract

A binary options trade is actually a contract entered into between the buyer or seller of the contract and the dealer. Every contract has terms, conditions and specifications which govern it, and serve to confer on it validity and a sense of responsibility on both parties to fulfill the terms of the contract.

A binary options contract will therefore have certain features and specifications. The specifications for online traded binary options contracts are different from the contract specifications on an exchange traded binary option such as is found in Nadex or Cantor Exchange. Some of the contract specifications in binary options are shown below:

Expiration Date: Every binary option trade has a time limit, and the last day or time that the contract will end is known as the expiration date/time. At the expiration of the contract, the contract will be settled according to how the asset price ended in relation to the terms of the contract. The expiration date has the same connotations in either an exchange-traded or online binary options platform.

Settlement Value: This is the value of the option contract when the trade expires. On NADEX, this will either be at $0 or at a fixed payout of $100. On an online platform, it will either be at $0 or at the established payout that the broker has set, which is generally between 65% and 90% of the invested amount. Some online platform allow for the use of a feature known as Loss Return, where a trader may decide to get some investment back in case of a trade loss. In this case, the trader will set a Loss Return figure, and settlement value will either be the chosen Loss Return (which does not exceed 10%) and the original payout less the loss return value.

Underlying Market Price: This is the real-time market price of the asset traded in the underlying contract. For most trades, the market price is used as the benchmark price for the trade (strike price). Some online platform allow traders to choose a different price as strike price (e.g. in the High/Low trade on BetonMarkets).

Contract: This is the basic unit of an options trade. In conventional options, a contract is made up of 100 units of the asset, but in binary options, whatever the trader has chosen as investment amount will serve as the contract value. For NADEX, one lot of the asset represents a contract.

Bid: The bid price is the premium price that a trader will pay to the dealer for opening an option to sell a contract, or to close a buy order. This feature is used in NADEX and on AnyOption to trade the Binary 0-100 contract.

Sell: This is a term used to define a bet strategy which is based on an expectation that the price of the underlying asset will drop. A trader will use a PUT on an open sell order.

Ask: This is the premium price that a trader will pay for buying a position from the dealer. This is equivalent to placing a CALL trade on a position anticipating an increase in the price of the underlying market. It is also the price paid by a trader who has an open position to sell and wants to close it out.

Spread: This is the difference between the bid price and ask price. It is the broker’s compensation. In any market, an increase in trade volume or increase in liquidity will tend to cause the spread to narrow. The reverse is also the case: little volume and liquidity will cause spreads to widen. In NADEX binary options spreads are interpreted in the context of the total return.

Commission Fee: This is a service charge that the trader pays on each transaction in the market. This is usually a fixed fee as opposed to the spread which is variable. NADEX charges $1 per transaction while Cantor Exchange charges $0.9 per fill on a price you make and $0.9 per in-the-money result. Different firms charge different commissions. Online binary options brokers do not charge separate commissions. The charges are billed into the trade.

Strike Price: The strike price is the benchmark price or price target that an asset must achieve at the expiration time or date, in the context of the trade for the trader to receive a payout. The trade context could be for the asset to be located at the strike price (TOUCH), above the strike price (CALL) or below the strike price (PUT).

Some trade types are deployed to have multiple strikes that the asset must achieve to earn a certain payout level. An example of this is the ladder trade. On NADEX, the ladder trade has up to 14 strike prices for each underlying contract.

Underlying market: This is the financial market that is tracked by a specific binary option. There are four financial markets usually tracked by binary options contracts. These are as follows:

1. Currencies
2. Stocks
3. Market indices
4. Commodities

Of these four markets, the currency market is a spot market while the other markets are all futures contracts with near term expiration times. Commodities are mostly traded on the futures markets (Commodity Exchange Inc or COMEX), and the same goes for energy contracts such as crude oil (NYMEX). However, there is also a spot market for commodity prices. Usually spot and futures contracts track each other closely. If you have a forex platform with commodity assets, you will notice that the contract usually changes after three months and you will be unable to trade the old contract once it has expired.

The following table illustrates the underlying markets assigned to the binary options market on NADEX and an online binary platform (AnyOption).

Conclusion

These terms explained above are the key features of binary options contracts, and they will be encountered whether the trader operates on NADEX or on one of the regulated online binary options platforms.