In the Money? ITM Binaries and the Best Time To Trade Them

In a previous article, it was covered what an At The Money (ATM) binary is, it’s advantages and disadvantages, and when the best times are to trade it. In this article, we will cover what it means for a binary to be In the Money, (ITM) and the best time to trade an ITM binary. Learning and understanding the moneyness of binaries can help you better choose the right priced binary for your trading system. The better you understand the rules of your system, and more importantly, why they are the rules, the better you will choose the right binary for your trade.

When you trade a binary option you are answering a yes or no statement. For example, the binary US 500 (Sep) >1953.0 (4:15PM) is asking, “Will the underlying market Emini S&P 500 be above 1953.0 at 4:15PM?” If you buy the binary, you are saying “Yes, it will be”, and if you sell it you are saying, “No, its going to be at 1953.0 or below 1953.0 at 4:15PM.”

With an ITM binary, the underlying market is already above that strike. It’s already above 1953.0. Therefore, not only are you paying for time value, like an ATM binary has, you are also paying for intrinsic value. For example, if you bought a Nadex binary ITM for $70, it’s higher priced than an ATM binary which would be around $50. It’s higher priced, because the market is already above the strike and now has a higher probability that it will expire ITM. To give you an idea of what that $70 represents, the first $50 is time premium and the next $20 is the real value of the binary, or the intrinsic value. If it were only $50, it wouldn’t be an ITM binary; it would be an ATM binary worth around $50 of time value.

Your probability percentage goes up with ITM binaries.

Obviously, this is an advantage as it is already ITM so the market doesn’t have to move for the binary to become profitable. It can stay where it is, or even move against your trade slightly and still be profitable. The only thing needed to profit is time decay or time to go by, and for the underlying market to remain ITM, above the strike, or to continue to move up in your favor. ITM binary option prices typically move slower; slower to your profit target but also slower moving should it go against your trade, which makes managing risk less challenging than an ATM priced binary.

You can control that risk with exiting early at any time to manage loss. This is possible with Nadex binaries which is unlike any international binary brokers where it’s not possible to exit early.

Nadex allows you to enter and exit at any time as long as there is a buyer or seller for the other side. Nadex binaries are worth $100. You can see on the buy and sell trade tickets below, when buying, the ask or offer amount (right side of the trade ticket) is what you pay to enter the trade and that is your total possible risk. The difference between your entry price and $100 is your total possible profit.

When you sell, the bid amount (left side) for the binary becomes your possible profit, and the difference between $100 and the bid price is your total possible loss as well as the amount you pay to enter the trade. On the Apex Binary Scanner, you can see that same strike with the profit and loss possibilities. The market has moved a little since the screenshots of the tickets, but with the binary scanner you are able to easily compare all of the binaries for that expiration and their possible risk/reward.

To view image click HERE

If the advantage of being ITM is higher probability, then the disadvantage is the higher price that comes with it. With the higher price, the profit potential becomes more limited. However, you should be taking profits anyway.

In addition, since it’s already ITM, typically price will move slower, thereby moving slower to your profit target. Paying more to enter the trade means you take on more total risk than an ATM or an Out of the Money, (OTM) binary. As mentioned before though, you can exit at any time and limit this risk, making the payout more than reasonable with Nadex.

You can learn how to not take a full loss, using the Apex Binary Scanner and other tools provided by Apex Investing. That way you can still keep your risk reward ratio to a 1:1.

For example, if you buy an ITM binary for $70 and you have a take profit set for $25, taking profit when the price reaches $95, you also need an exit strategy, in case the price moves against you. Since you know the price will be around $50 when the underlying reaches the strike, you can plan to exit if the Nadex indicative reaches the strike.

Then you are exiting at or close to $50 with around a $20 loss. That’s giving you a trade with a 70% probability of expiring ITM, and you still have a 1:1 risk reward ratio or a little better than 1:1! All this is possible with Nadex binaries and utilizing some of Apex Investing’s tools.

Going back to really knowing and understanding the “why” of your rules for your strategy, consider what you anticipate the market is going to do. If you are buying or selling a binary and you think the market has made its expected move, and there isn’t too much time left to decay until expiration, then an ITM binary would be a good choice.

It’s higher probability already being ITM, there isn’t a whole lot of time left for the market to move, but you won’t need it to; your binary is already ITM.

To learn more about how to trade binary options in-depth and for binary options signals, trading strategies, tools and trade rooms see ApexInvesting.com.

The following article is from one of our external contributors. It does not represent the opinion of Benzinga and has not been edited.

Posted-In: apexin

Axel Merk: Time to Take ‘Chips Off the Table’

Inflated asset prices, investor complacency and brewing crisis that could trip up the current happy equilibrium are the backdrop for Axel Merk’s warning that it is time for investors to start “taking chips off the table.”

But the key difficulty for the Merk Investments founder and portfolio manager in his latest investment analysis is where to hide in an environment in which “instability may be the new normal.”

To answer that question, Merk first locates tracks the market’s current state as one of complacency — which is the third of three states in a market crisis.

Typically, he says, equity markets sell off in a crisis; as that crisis evolves, markets tend to differentiate: For example, when Cyprus blew up, Spanish bonds were undisturbed. In the third and current stage of a crisis, risk seems manageable.

“When a Portuguese company didn’t pay its loans on time, the markets barely blinked,” Merk writes.

It is at this stage that pundits typically advise not to sell but rather to buy the dips.

And this approach is vindicated by central bank easy-money policies that have the effect of compressing risk premiums.

European Central Bank chief “Mario Draghi has promised to do ‘whatever it takes.’ So why shouldn’t investors chase yields in the weaker Eurozone countries?” Merk asks.

The currency portfolio manager similarly critiques Fed chair Janet Yellen, whom he assesses as having “all but promised … to be late in raising rates.” What’s more, he thinks any nominal rate increases will be meaningless, because of inflation, such that he expects real rates to remain the same.

The trouble lurking in this low rate, high complacency environment is the danger that risk premia will suddenly and unexpectedly rise.

And while the source of this shift could be as subtle as a change of perception (“the glass is suddenly half empty”) or a result of the Fed seeking to engineer an exit, Merk devotes much of his analysis to growing social and geopolitical disorder.

In the social sphere, central bank easy-money policies are destroying society’s social fabric because asset holders are benefiting disproportionately, thus enlarging the wealth gap.

“I would argue policies of the Fed have a far greater impact on wealth distribution than the policies of Republicans or Democrats,” writes Merk. “Those that know how to deal with easy money, such as hedge funds, can do great in this environment; however, those that don’t know how to deal with debt easily fall through the cracks, unable to recover.”

The result is a deep erosion in purchasing power that fuels populist movements such as the Tea Party and Occupy Wall Street; Japanese Prime Minister Shinzo Abe’s populist policies; uprisings in the Middle East; and the ascendency of populist parties in Europe of late.

In this light, Ukraine’s essential problem is its inability to balance its books, thus turning initially to Russia and now to the European Union for subsidies.

Noting that World War II was preceded by the Great Depression, Merk says that “the aftermath of a credit bust is a fertile environment for the sort of dynamics that can lead to armed conflict. Russia has an interest in an unstable Ukraine; Japan might ramp up military spending to boost domestic growth, to name but two sources of instability.”

While not predicting World War III, Merk continues that “the U.S., a superpower no longer able to finance all of its commitments, is not exactly a source of stability, either: the biggest threat to U.S. national security may not be China or Russia, it’s the national debt.”

Merk is pessimistic about the possibility of dealing with the debt through entitlement reform in an environment of rising populism, for which reason he is convinced that real rates will have to remain low lest U.S. debt servicing costs rise by $1 trillion or more a year with a rise in rates.

So with asset prices at or near record levels and volatility at record lows, combined with rising world and domestic instability, investors should try to steer their portfolios away from risk.

Merk thinks bonds will be among the worst performers in the coming decade, and besides, are too risky to short because of the requirement to pay interest; he does not see the dollar as a safe haven with real interest rates in negative territory; and buying equities now means coming “late to the party.”

Investing in gold makes sense, he says, “as low to negative real interest rates may make the shiny metal that pays no interest (but cannot be easily ‘printed’) a formidable asset.”

Investors might also “diversify to baskets of currerncies” and “possibly be tactical in an effort to stay a step ahead as currency wars may be raging.” 

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