Gold Binary Options
Buying a Gold Binary Option
This example illustrates buying a Binary Option on the price of Gold, and leaving the position until expiry at the end of the trading session.
Which contract?
It is 8am ET. Gold futures are trading at $948.12 in the underlying market. You think that Gold is likely to end the day at a higher level and decide to trade on this with a Binary Option.
Nadex lists 23 different Binary Options on Gold that expire at the end of the day's Gold trading. These offer different strike prices staggered at $2.50 intervals. On this particular day, the strikes range from $920 to $975.
You think that $950 is a realistic target for the end of the day, and focus on the 'Gold >$950 at 1:30PM' contract.
Making the trade
You log into Nadex and launch a ticket for 'Gold >$950 at 1:30PM'. You enter an order to buy 5 contracts at a price of 34.25. Your order is filled and the position is now open.
You have bought the option, so your maximum loss will occur if the option settles at 0 for a loss of 34.25 points. Each contract is worth $1/point to you, and you have bought 5 contracts, so your maximum risk is: 5 contracts x 34.25 points x $1 = $171.25.
You would therefore need $171.25, plus any trading fees, in your account in order to open the position.
Expiry and settlement
You leave your position open until expiry at 1:30pm. When a contract expires, Nadex calculates an Expiration Value based on the underlying market prices. The Expiration Value is used to settle the contract.
The Expiration Value is $950.66. In this case, the Binary condition (Gold to be above $950 at 1:30pm) has been achieved, so the Binary Option is settled at 100.
Note: When you open a position, you do not have to hold it until expiry. You can log into the platform and enter an order to close, or partially close, your position at any time until expiry. See Example: USD/JPY.
Calculating profit and loss
You bought the contract a level of 34.25. It settled at 100. So you made: 100 - 34.25 = 65.75 points profit.
Each contract is worth $1/point to you, so your profit on 5 contracts is: 5 contracts x 65.75 points x $1 = $328.75.
To calculate the overall result, you will also have to take into account any trading and settlement fees you have paid. And, of course, if the underlying market had moved against you, then you would have made a loss instead of a profit.