Binary options are based on a simple 'yes' or 'no' proposition: Will an underlying asset be above a certain price at a certain time? Traders place trades based on whether they believe the answer is yes or no, making it one of the simplest financial assets to trade. This simplicity has resulted in broad appeal amongst traders and newcomers to the financial markets. As simple as it may seem, traders should fully understand how binary options work, what markets and time frames they can trade with binary options, advantages and disadvantages of these products, and which companies are legally authorized to provide binary options to U.S. residents.

1. A Guide To Trading Binary
Options In The U.S.

2. binary options trading
• Binary options are based on a simple 'yes' or 'no' proposition: Will an
underlying asset be above a certain price at a certain time? Traders place
trades based on whether they believe the answer is yes or no, making it
one of the simplest financial assets to trade. This simplicity has resulted in
broad appeal amongst traders and newcomers to the financial markets. As
simple as it may seem, traders should fully understand how binary options
work, what markets and time frames they can trade with binary options,
advantages and disadvantages of these products, and which companies
are legally authorized to provide binary options to U.S. residents.
• Binary options traded outside the U.S. are typically structured differently
than binaries available on U.S. exchanges. When considering speculating
or hedging, binary options are an alternative, but only if the trader fully
understands the two potential outcomes of these "exotic options." (For
related reading, see: What You Need To Know About Binary Options
Outside The U.S.)

3. U.S. Binary Options Explained
• Binary options provide a way to trade markets with capped risk and capped profit
potential, based on a 'yes' or 'no' proposition.
• For example: Will the price of gold be above $1,250 at 1:30 p.m. today?
• If you believe it will be, you buy the binary option. If think gold will be below
$1,250 at 1:30 p.m., then you sell this binary option.
• The price of a binary option is always between $0 and $100, and just like other
financial markets, there is a bid and ask price.
• The above binary may be trading at $42.50 (bid) and $44.50 (offer) at 1 p.m. If you
buy the binary option right then you will pay $44.50, if you decide to sell right then
you'll sell at $42.50.
• Let's assume you decide to buy at $44.50. If at 1:30 p.m. the the price of gold is
above $1,250, your option expires and it becomes worth $100. You make a profit
of $100 - $44.50 = $55.50 (less fees). This is called being "in the money."
• But if the price of gold is below $1,250 at 1:30 p.m., the option expires at $0.
Therefore you lose the $44.50 invested. This called "out of the money."
• The bid and offer fluctuate until the option expires. You can close your position at
any time before expiry to lock in a profit or a reduce a loss (compared to letting it
expire out of the money).

4. A Zero-sum Game
• Eventually every option settles at $100 or $0; $100 if the binary
option proposition is true, and $0 if it turns out to be false. Thus
each binary option has a total value potential of $100, and it is a
zero-sum game – what you make someone else loses, and what you
lose someone else makes.
• Each trader must put up the capital for their side of the trade. In the
examples above, you purchased an option at $44.50, and someone
sold you that option. Your maximum risk is $44.50 if the option
settles at $0, therefore the trade costs you $44.50. The person who
sold to you has a maximum risk of $55.50 if the option settles at
$100 ($100 - $44.50 = $55.50).
• A trader may purchase multiple contracts, if desired.
• Another example: NASDAQ US Tech 100 index > $3,784 (11 a.m.).

5. • The current bid and offer is $74.00 and $80.00,
respectively. If you think the index will be above $3,784
at 11 a.m., you buy the binary option at $80 (or place a
bid at a lower price and hope someone sells to you at
that price). If you the think the index will be below
$3,784 at that time, you sell at $74.00 (or place an
offer above that price and hope someone buys it from
you).
• You decide to sell at $74.00, believing the index is
going to fall below $3,784 (called the "strike price") by
11 a.m. And if you really like the trade, you can sell (or
buy) multiple contracts.
• Figure 1 shows a trade to sell five contracts ("size") at
$74.00. The Nadex platform automatically calculates
your maximum loss and gain when you create an order,
called a "ticket."

6. Nadex Trade Ticket with Max Profit
and Max Loss (Figure 1)
• Source: Nadex.com
• The maximum profit on this ticket is $370 ($74
x 5 = $370), and the maximum loss is $130
($100 - $74 = $26 x 5 = $130) based on five
contracts and a sell price of $74.00. (For more
on this topic, see Introduction To Binary
Options)
•

8. How the Bid and Ask are Determined
• The bid and ask are determined by traders themselves as
they assess the probability of the proposition being true or
not. In simple terms, if the bid and ask on a binary option
are at 85 and 89, respectively, then traders are assuming a
very high probability that the outcome of the binary option
will be 'yes,' and option will expire worth $100. If the bid
and ask are near 50, traders are unsure if the binary will
expire at $0 or $100 – it's even odds.
• If the bid and ask are at 10 and 15, respectively, that
indicates traders think there is a high likelihood the option
outcome will be 'no,' and expire worth $0. The buyers in
this area are willing take the small risk for a big gain. While
those selling are willing to take a small – but very likely –
profit for a large risk (relative to their gain).

9. Where to Trade Binary Options
• Binary options trade on the Nadex exchange, the first
legal U.S. exchange focused on binary options. Nadex
provides its own browser-based binary options trading
platform which traders can access via demo account or
live account. The trading platform provides real-time
charts along with direct market access to current
binary option prices.
• Binary options are also available through the Chicago
Board Options Exchange (CBOE). Anyone with an
options-approved brokerage account can trade CBOE
binary options through their traditional trading
account. Not all brokers provide binary options trading,
however.

10. Fees
• Each Nadex contract traded costs $0.90 to enter and
$0.90 to exit. The fee is capped at $9, so purchasing 15
lots will still only cost $9 to enter and $9 to exit.
• If you hold your trade until settlement and finish in the
money, the fee to exit is assessed to you at expiry.
• If you hold the trade until settlement, but finish out of
the money, no trade fee to exit is assessed.
• CBOE binary options are traded through various option
brokers; each charge their own commission fee.

11. Pick Your Binary Market
• Multiple asset classes are tradable via binary option. Nadex offers trading in major
indices such as the Dow 30 (Wall Street 30), the S&P 500 (US 500), Nasdaq 100 (US
TECH 100) and Russell 2000 (US Smallcap 2000). Global indices for the United
Kingdom (FTSE 100), Germany (Germany 30) and Japan (Japan 225) are also
available.
• Trades can be placed on forex pairs: EUR/USD, GBP/USD, USD/JPY, EUR/JPY,
AUD/USD, USD/CAD, GBP/JPY, USD/CHF, EUR/GBP, as well as AUD/JPY.
• Nadex offers commodity binary options related to the price of crude oil, natural
gas, gold, silver, copper, corn and soybeans.
• Trading news events is also possible with event binary options. Buy or sell options
based on whether the Federal Reserve will increase or decrease rates, or whether
jobless claims and nonfarm payrolls will come in above or below consensus
estimates. (For more on this topic, see Exotic Options: A Getaway From Ordinary
Trading)
• The CBOE offers two binary options for trade. An S&P 500 Index option (BSZ)
based on the the S&P 500 Index, and a Volatility Index option (BVZ) based on the
CBOE Volatility Index (VIX).

12. Pick Your Time Frame
• A trader may choose from Nadex binary options (in the above asset
classes) that expire hourly, daily or weekly.
• Hourly options provide opportunity for day traders, even in quiet
market conditions, to attain an established return if they are correct
in choosing the direction of the market over that time frame.
• Daily options expire at the end of the trading day, and are useful for
day traders or those looking to hedge other stock, forex or
commodity holdings against that day's movements.
• Weekly options expire at the end of trading week, and are therefore
traded by swing traders throughout the week, and also by day
traders as the options' expiry approaches on Friday afternoon.
• Event-based contracts expire after the official news release
associated with the event, and therefore all types of traders take
positions well in advance of -- and right up to – the expiry.

13. Advantages and Disadvantages
• Unlike the actual stock or forex markets where price gaps or slippage can occur,
the risk on binary options is capped. It's not possible to lose more than the cost of
the trade.
• Better-than-average returns are also possible in very quiet markets. If a stock index
or forex pair is barely moving, it's hard to profit, but with a binary option the
payout is known. If you buy a binary option at $20, it will either settle at $100 or
$0, making you $80 on your $20 investment or losing you $20. This is a 4:1 reward
to risk ratio, an opportunity which is unlikely to be found in the actual market
underlying the binary option.
• The flip side of this is that your gain is always capped. No matter how much the
stock or forex pair moves in your favor, the most a binary option option can be
worth is $100. Purchasing multiple options contracts is one way to potentially
profit more from an expected price move.
• Since binary options are worth a maximum of $100, that makes them accessible to
traders even with limited trading capital, as traditional stock day trading limits do
not apply. Trading can begin with a $100 deposit at Nadex.
• Binary options are a derivative based on an underlying asset, which you do not
own. Therefore, you're not entitled to voting rights or dividends that you'd be
entitled to if you owned an actual stock.

14. The Bottom Line
• Binary options are based on a 'yes' or 'no' proposition. Your profit
and loss potential are determined by your buy or sell price, and
whether the option expires worth $100 or $0. Risk and reward are
both capped, and you can exit an options at any time before expiry
to lock in a profit or reduce a loss. Binary options within the U.S are
traded via the Nadex and CBOE exchanges. Foreign companies
soliciting U.S. residents to trade their form of binary options are
usually operating illegally. Binary options trading has a low barrier
to entry, but just because something is simple doesn't mean it'll be
easy to make money with. There is always someone else on the
other side of the trade who thinks they're correct and you're
wrong. Only trade with capital you can afford to lose, and trade a
demo account to become completely comfortable with how binary
options work before trading with real capital.
Read more:

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