Trade Global Markets with Binary Options
Provided by MrTopStep.com
With the world more connected than ever, trading has taken on a much more global context. The result is that many traders are far more aware of what is happening in the equity index markets in Europe and Asia; however, having access to trade foreign markets is not always simple.
Some traders who want to take part in the global context may trade Exchange-Traded Funds (ETFs) in the United States, which track these foreign markets. However, ETFs are only open during U.S. daytime trading hours, which presents a real challenge to trading those instruments, especially when attempting to trade in shorter time frames, because these foreign markets are all open during the U.S. night hours while these ETF’s are closed.
Some traders may look to futures as a means to trade foreign markets. The drawback with futures is that not every futures broker In the U.S. is able to offer access to the European and Asian markets, and the brokers who do often charge higher trading fees.
Furthermore, if your broker does offer these markets, fees for the Asian and European markets’ data feed and charts could be an additional cost. Combining these expenses with other data and possible platform fees could run you a considerable financial overhead just to have access to trade foreign markets, which may be too steep of a price to pay for small retail traders or new traders just trying to learn the ropes of trading the international indices.
Also, when trading international markets with futures, contract sizes, tick values and even margin requirements are often given within local currency, which may sometimes be confusing for traders; and many traders with smaller accounts are unable to take part in futures trading because they find that the tick value is too large.
The good news is that another choice exists for trading international markets besides ETFs and futures markets. Traders who are interested in following and participating in international indices may choose to trade CFTC exchange regulated binary options that are based on markets in Japan, China, Germany and Great Britain as well as the major markets in the United States.
While binaries do not exactly replicate futures contracts, they have similarities that provide traders a variety of appealing ways with limited risk to implement their market views.
Binary options available on Nadex, have no platform cost, no data fees, and no margin requirements, and all prices are quoted in U.S. dollar terms. In addition, binary options are available during the active hours of each international market.
Binaries’ small contract sizes will especially appeal to traders new to international markets and those with small accounts. The smaller contract sizes permit trading with defined risk and reward, and trades can be entered with less than $100 as the base settlement value of the binary option is $100 per contract at expiration.
To trade binary options, the trader develops a price target in a market, chooses an expiration timeframe, and looks for a strike close to their target. Binaries may either be bought or sold.
Buying a binary option means a trader wants the market to settle above the strike price, risking the purchase amount to attempt to profit on difference between that purchase price and the $100 settlement value.
Selling a binary means the trader wants the market to settle below the strike price, attempting to profit on the sale amount while risking the difference between that sale price and the $100 settlement.
Let’s look at an example of how this might work. The chart above shows the Nadex Japan 225 indicative index which is a based off the SGX Nikkei 225 Index Futures with the most recent price value at 19,715.00. To the right of this chart are a list of all the daily binary strikes available which expire in just over six hours.
If you believed the Nikkei 225 market price was going to trade higher, making a new day high and close above 19,800, just 85 points above the current market, you might consider buying the Japan 225 binary >19,800 strike at 24.75. To initiate this trade would cost $24.75 to earn $75.25 per contract if this trade finishes in the money at expiration which would amount to a return of 300% on risk. Of course if the binary position did not finish in the money holding held until expiration, your loss would be the initial of cost of $24.75 per contract.
On the other hand, if you believed that this market could possibly trade lower but looked for it to hold above the 19,640 level, then you could consider buying the 19,640 binary strike option at 79.50. Here this binary would finish in the money if the underlying market traded higher, sideways and even lower as long as the underlying market price was above 19640 at expiration. Obviously in this example, the binary buyer has the initial advantage and has to pay for that advantage with a higher initial cost in comparison. So in this example, your initial binary trade cost would be $79.50 to make a $20.50 profit per contract if the binary contract finishes in the money at expiration for slightly better than a 25% return on risk.
Of course, if you were bearish, you could sell any of these binary strikes hoping for a close below the strikes; or you could trade multiple options if your view was non-directional or unbiased. Between the various expirations, strikes, and foreign markets (as well as other trading instruments), traders can find many ways to implement these options.
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.