Selling binary options may seem strange to new traders. After all, how do you sell something you do not own? Yet in the financial markets it’s done all the time and traders should be comfortable with both buying and selling instruments. When selling an instrument, traders sell with anticipation of buying it back at a lower price in the near future. The profit is calculated by subtracting the buyback price from the trader’s original sell price. Of course, if price increases, instead of decreasing, then a loss is incurred. Here is an example using the GBPUSD on Friday, May 12th.
Selling Binary Options – GBPUSD Example
On Friday, the GBPUSD price had moved up but could not break the previous resistance at 1.2890. This area was tested numerous times and price simply could not move above this area. An Out of the Money short (which means to sell) could be entered at 1.2876 (about ten pips from where price was currently trading). The risk on the trade would be $29.25 (maximum payout, $100, minus the premium shown in red, $70.75). In other words, the trader could not lose more than $29.25 on the trade if price moved against the position.
Remember, the trader sells at a high price and then buys it back at a lower price. Since binary options have a maximum payout of $100, the trader is selling at $70.75 in anticipation of buying it back when it goes lower.
In this example, price does move lower as the chart below shows. The trader now has the choice to buy it back at $10 or allow it to expire. If the trader buys it back (red arrow highlights the strike that was entered), the price is $10. Using the price the trader sold at ($70.75) minus the buyback price ($10), the resulting profit is $60.75.
To learn more about selling binary options, join this Wednesday’s webinar at 11am New York time and Gail Mercer will show you how to sell binary option contracts and then manage them from start to finish.
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.