Trading Volatility - Sponsored by Nadex
The perceived volatility of the underlying market also affects the binary pricing. Sticking with our previous example, the EUR/USD 138 binary has about 1 ½ hours until expiration and the spot EUR/USD currency pair is trading at 1.3810. On a low volatility day, the 138 binary may be trading at 90 because there is little expected movement from the spot EUR/USD. The binary is already 10 pips in the money and the underlying market is expected to be flat thus the probability of the buyer receiving the $100 payout looks good.
However, if the EUR/USD has been flying around in a volatile trading session, the binary may be trading for less than 90 due to a greater level of uncertainty. When there is market uncertainty, then the binary pricing will be skewed toward 50 as the initial cost of the binary participants become more equally weighted given the market outlook.
Simply put, the price of the aforementioned binary option may be seen as what the market in its combined wisdom of supply and demand believes the probability of the likelihood the event described in the binary option will occur. In this example that would be the EUR/USD being above 1.38 on expiration.
It’s important to stress that binary options listed on Nadex are tradable during the entire market day. There is no obligation on the part of either the buyer or seller to carry the position until expiration. This makes binary options an outstanding and flexible trading vehicle.