A typical binary options trade

Binary Option Example: US 500

This example looks at taking a position on where you think the US 500 expiration value will be at 4:15 p.m. ET with a daily binary option.

It is 8 a.m. ET. The CME E-mini® S&P 500 Index® future, from which Nadex calculates expiration values for its US 500 products, is trading at 1175.0. Nadex lists 21 different daily US 500 binary options that expire at the end of the day's trading. The binaries offer different strike prices staggered at 3-point intervals. On this particular day, the strikes range from 1142.0 to 1202.0.

You decide to trade on the US 500 (Jun) > 1175.0 (4:15 p.m. ET) binary option.

You buy the binary option if you think the index future is going to finish the day above the 1175 strike price. You sell the binary option if you think the index future will finish the day at or below the 1175 strike price. Below shows what happens for both trades.

The above example shows what would happen if you held your position to expiration. You could, of course, also offset your position during the trading day.

Following along with the above example, focusing on the scenario where you buy 1 contract at 62.50.

Now let's say the market rallies and you think it may be at the highs for the day, and you decide to offset. Here is what your position would look like if you sold the same position at 80.00:

In this example, you were willing to forego the potential $20 in additional profit if the market closed above your strike price, which would have given you a $100 payout. The main point is that you can offset a position prior to expiration if your view of the market changes, or if you want to lock in profits on a trade, or cut your losses on a trade. Just remember that stop orders are not accepted by Nadex -- so you will have to use limit orders to offset your position.

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