Binary Options and Volatility

In Blog by Michael Arnold

iStock_000031891380_Large-300x200People decide to explore Nadex Binary options due to the lure of the simple, and easy to understand “true or false” prediction. A trade can be placed on a credible and regulated exchange with the risk limited to the price paid for the trade. While these things are all true and are indeed some of the key benefits of trading Nadex binary options, people must remember that they are in fact, placing options trades. When trading options, even simple ones, you must have a base knowledge of volatility; What it is and how it affects the price of your option.

A simple definition of volatility (vol) is “the relative rate at which the price of a security moves up and down”. An easy was to think of it is, price range expansion or compression during a given time period. So, if price is moving in a wider range at a faster pace than normal, vol is rising. If price is moving in a tighter range at a slower pace than normal, vol is falling. You can clearly see this in the chart below.
Vol-QM-300x112-1In options (which Nadex binaries are), you would want to be looking at the changes in volatility of the indicative index and its effect on the price of the long or short option you own. There are other factors, called “The Greeks” that will come into play, but they also change with rising and falling volatility (if you would like to learn more about The Greeks, please go to the Nadex youtube channel and watch the series of videos  that break down Nadex spreads and their construct here: https://www.youtube.com/user/nadex/videos). Understanding volatility will help you choose the correct option to trade, so spend some time with the concept. You have found the right products on the right exchange now take a few more steps and learn the factors that will help you pick the correct trade.

Futures, options and swaps trading involve risk and may not be appropriate for all investors. Past performance is not necessarily indicative of future results