Forex Binary Options

Forex Binary Options

Selling a USD/JPY Binary Option

This example illustrates selling a Binary Option on the value of USD/JPY, and then trading out of the position before expiry.

Which contract?

It is 8:15am ET. USD/JPY is trading at 97.54 in the underlying Spot forex market. You think that the yen is likely strengthen during the day and decide to speculate on this with a Binary Option.

Nadex lists 21 different Binary Options on USD/JPY that expire at the end of the day's trading session at 3pm. These have different strike prices staggered at intervals of 0.20. On this particular day, the strikes range from 95.00 to 99.00.

If the yen gets stronger, then the value of USD/JPY will fall. You think that 97.00 is a realistic target for 3pm, and focus on the 'USD/JPY >97.00 at 3PM' contract.

Making the trade

You log into Nadex and launch a ticket for 'USD/JPY >97.00 at 3PM'. You think that the value of USD/JPY at 3pm will be less than 97.00, so you sell the Binary Option (which would settle at 0 if USD/JPY is not above 97.00 at 3pm).

You enter an order to sell 3 contracts at a price of 72.5. Your order is filled and the position is now open.

You have sold the option, so your maximum loss will occur if the option settles at 100 for a loss of 27.5 points. Each contract is worth $1/point to you, and you have sold 3 contracts, so your maximum risk is: 3 contracts x 27.5 points x $1 = $82.50.

You would therefore need $82.50, plus any trading fees, in your account in order to open the position.

Trading out of the position

By midday, the value of USD/JPY has actually risen slightly. You decide that your initial view was incorrect and decide to cut your losses.

You had originally sold 3 contracts, so you can close your position by buying 3 contracts. You log into Nadex and enter an order to buy 3 contracts of 'USD/JPY >97.00 at 3PM' at 93.5. Your order is filled and you no longer hold a position in this market.

Calculating profit and loss

You sold the contract a level of 72.5, and later bought it back at a level of 93.5. So you made a trading loss of: 93.5 - 72.5 = 21 points.

Each contract is worth $1/point to you, so your loss on 3 contracts would be: 3 contracts x 21 points x $1 = $63.

To calculate your overall result, you also need to take account of any trading fees you paid to open and close the position.

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The maximum risk for any trade is fixed and required in advance so you cannot be called upon for further funds. But please remember these are volatile instruments and there is a high risk of losing your initial investment on each individual transaction.