Nadex Binary Options – Everything You Need To Know
It’s true… most binary options brokers are not regulated. In fact, The SEC has discouraged US residents to open an account with many of the overseas binary option brokers. However, there is one broker in the US that is regulated by the Commodity Futures Trading Commission. That broker is Nadex. To open an account with Nadex, you must be a US resident with a permanent US address, have a US bank account and a valid Social Security or Tax ID number.
If you meet these requirements, read on.
Well, naturally, trading binary options with Nadex offers the benefits of defined risk and no margin calls. Your max risk is the margin, don’t worry, the margin is much less than trading vanilla options on commodities and FX. In addition, the barrier of entry is low. For example, the minimum deposit required to open a Nadex account is $100.
Of course, there are some differences between Nadex and other binary option brokers. In fact, Nadex allows you to exit positions before expiration. On the downside, Nadex charges commissions and fees to the executing trader. One thing that Nadex has in common with other binary option brokers is that the trader has a defined max risk and a defined max payout.
One of the reasons why some traders stay away from binary options is that the house has an advantage. For standard digital options, the trader is risking more than they can make. This is not always the case with Nadex, the trader can set up favorable risk to reward setups in which the reward outweighs the risk. For example, let’s assume the max you can make on a binary trade is $100. A trader could purchase a call for $25, giving them a 3-1 risk to reward setup. The time decay and volatility component is built into the option. The payoff resembles what you’d see out of a probability model. For example, let’s assume the max a binary trade can be worth is $100 and the trader believes the position has a good chance of finishing in the money. The value of the binary option would reflect this if the cost of the option is $75. In this case, the trader is risking more than what they could make, but the probability of them being right is greater, hence the reward is only $25. You know what? You can also sell binary options without the fear of getting a margin call.
Nadex uses the terms market ceiling and market floor. The market ceiling is the most the position will be worth, which would then be subtracted by the cost plus the commissions and fees. The market floor is the worst outcome at expiration, which is $0 minus the commissions and fees. However, you may have a chance to close out the trade before expiration for potentially a small gain or a lesser loss than the max.
Nadex offers traders the ability to trade economic events, commodity futures, stock index futures and spot forex. The contracts are meant to replicate actual futures markets. For example, the Germany 30 contract is based on the EurexDax Index Futures. Duration of contracts can be intraday, daily and weekly. All contracts are cash-settled, which simply means that you don’t have to worry about getting assigned with delivery, if a contract settles in the money, you’ll receive a cash payout.
By the way, Nadex allows you to implement strategies like straddles, premium collection and vertical spreads. Again, this all possible due to the various risk to reward setups available. Their trading platform is free download and offers a decent charting platform as well.
In conclusion, Nadex offers traders a lower barrier of entry to the futures markets. With that said, the trader must take into account the fees and commissions associated with trading through Nadex. Their platform allows for more flexible trading strategies. However, it’s best that you demo an account and see for yourself if it’s worthwhile.
