The five-minute bars on the chart below show the Germany 30 settlement index, based off of the DAX futures, with today’s (Tuesday’s) session just seconds past 7:00 a.m. EST. The right of the chart shows the binary option ladder for options expiring in one hour.
This market has been making a series of higher highs and higher lows throughout the day, and the most recent trend on this chart is showing an upward move. Currently, this index is at 12684.60 and the high of day was at 12700 area.
The binary option ladder includes a strike at 12694, just 10 points out-of-the-money, but still below the high of day. If you thought that this market would push to a new high of day and settle the hour somewhere above this strike, then you could consider to be a buyer of this option at the offer of $33.00.
These CFTC-regulated binary options have a base settlement value of $100. Therefore, if you buy the option, the risk is limited to the purchase amount, while the reward would be the difference between the purchase amount and the $100 value.
So in this example, the risk would be limited to $33.00, while the potential reward on an hourly settlement above the strike would be $67.00, or better than a 2:1 return on risk.
However, if you thought that this market had made enough highs and would now make a low intraday high, and then a lower 
low, you could choose to be a seller of the 12674 strike, 10 points below the current market.
If this were your view, you would sell this strike on the bid of $66.00. When selling a binary option, you want the settlement to be below the strike with the potential reward being the sale price and the risk being the difference between that amount and the $100 settlement value.
Therefore, in this second example, the potential profit would be $66.00, while the risk would be $34.00. This return would return about 190% on risk.
To traders, the question of whether a market will settle above or below a certain price in a specific time frame may seem ordinary, as they process this information throughout the day.
However with binary options, which operate on a simple yes / no proposition, simple questions can lead to extraordinary opportunities.
Note: Exchange fees not included in calculations.
Nadex Risk Disclaimer
- Trading on Nadex involves financial risk and may not be appropriate for all investors. The information presented here is for information and educational purposes only and should not be considered an offer or solicitation to buy or sell any financial instrument on Nadex or elsewhere. Any trading decisions that you make are solely your responsibility. Past performance is not indicative of future results. Nadex instruments include forex, stock indexes, commodity futures, and economic events.
- Nadex binary options and spreads can be volatile and investors risk losing their investment on any given transaction. However, the limited-risk nature of Nadex contracts ensures investors cannot lose more than the cost to enter the transaction. Nadex is subject to U.S. regulatory oversight by the CFTC.
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