What does Expiration mean when trading Binary Options

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What Does Expiration or Expiry Mean?

The expiration or expiry of a binary option, spread, or other option is the date and time when the option is converted into cash or (with some other options) an underlying asset.

The underlying market price at expiration is called the settlement price. If the settlement price is above the strike price of the binary option, the binary is settled for $100. If it is at or below the strike price, the binary settles at zero.

Derivatives have expiration dates

Some investments don’t expire. You can own gold for the rest of your life and pass it on to your heirs. You can own stocks for as long as the company is in business. Most other financial instruments, like futures contracts or options or binary options or spreads have an expiration date.

Such derivatives cannot be traded after their expiration. Your position is either cash settled, meaning you get some amount of money in exchange for your derivative contract, or the underlying asset is actually made deliverable to you.

Settlement and delivery facts and myths

Options on futures contracts have expirations, too. If your option expires in the money, you may exercise it or it may even be exercised for you and you will then have a futures contract which is approaching a later expiration date.

Contrary to an old myth, you won’t get 40,000 pounds of corn actually delivered to you if you hold a corn futures contract (or corn binary option) until expiration. With the futures contract, you’d get a receipt giving you ownership of some corn in a silo somewhere.

With a Nadex binary option or spread, you get cash at expiration. In the case of a binary option, you’ll get either $100 or $0. When a spread expires, you’ll receive your profit or loss in the form of a credit or debit to your account balance. All Nadex contracts are cash-settled derivatives.

A | B | C | D | E | F | G | H | I | J | K | L | M | N | O | P | Q | R | S | T | U | V | W | X | Y | Z

What Does Expiration Value Mean?

Nadex calculates the Expiration Value for all binary options and spreads using a consistent, transparent process. All binary option and spread contracts will end with the same expiration value if they both have the same underlying market and expiration time. Why? They are derivatives of the same underlying market and that market can only have one price at a particular time.

Why is that important for you to know? Some binary options broker-dealers are not transparent. You simply have to take their word that they are giving you a fair outcome. As a CFTC-regulated, US-based financial exchange, Nadex plays by strict rules of transparency and fairness. You can trust our pricing.

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The settlement calculations for contracts based on futures and currencies are slightly different, as described below.

Futures Expiration Value Calculation

Normal activity (fewer than 25 trades in the last 10 seconds):

  • Take the last 25 trade prices in the underlying market
  • Remove the highest and lowest five prices, leaving the middle 15
  • Average the remaining 15 prices and round to one decimal point past the precision of the underlying market. (For the Wall Street 30 we round to the same precision as the underlying.)

High activity (25 or more trades in the last 10 seconds):

  • Where 25 or more trades are collected in the last 10 seconds before expiration, take all trades collected during that time period
  • Remove the highest and lowest 20% of trades. If 20% of the data set is a non-integer, round down to the nearest integer and remove that many prices
  • Average the remaining trade prices and round to one decimal point past the precision of the underlying market (except for the Wall Street 30 which is rounded to the point of precision)

Forex (Currency) Expiration Value Calculation

Unlike futures, which are traded on exchanges, currencies are traded on a delocalized global network. Therefore the expiration value calculation is different, but the goal is the same: to get an accurate picture of the market and determine the trade outcomes fairly.

Instead of trade prices, Nadex uses midpoint prices, the price midway between the best bid and offer which are no more than 10 pips apart. Pips are the smallest price increment in forex, similar in usage to a tick in futures. The underlying market price data comes from a proprietary forex data feed based on data from major banks. Backup data may be obtained through Bloomberg or another trusted data provider.

Nadex calculates the expiration values for spot FX with different calculations under normal conditions and for highly active markets.

Normal activity (fewer than 10 midpoint prices in the last 10 seconds)

  • Take the last 10 midpoints (10 pips wide or less) in the underlying market, before expiration
  • Remove the highest 3 prices and lowest 3 prices
  • Average the remaining 4 prices and round to one decimal point past the precision of the underlying market

High activity (10 or more midpoint prices in the last 10 seconds)

  • Take all midpoints collected (10 pips wide or less) in the last 10 seconds
  • Remove the highest and lowest 30% of prices. If 30% of the data set is a non-integer, round down to the nearest integer and remove that many prices
  • Average the remaining prices and round to one decimal point past the precision of the underlying market

Economic Event Expiration Value Calculation

The expiration value for an economic report contract is the figure released by the designated reporting body. For example, the weekly jobless claims number is reported by the US Bureau of Labor Statistics and the Fed Funds rate is reported by the Federal Open Market Committee of the US Federal Reserve.

Spreads

Since binary options are all or nothing, if the option moves in the money—above the strike price—by even the minimum amount, you still receive the full $100 payout. For spreads, by contrast, a small increase or decrease in price just before expiration will have a relatively small impact on your final payout.

Nadex offers roughly 10,000 contracts per day, which expire at various times throughout the day. Below is a platform screenshot showing the Nadex US 500 binary options and spreads expiring at 2pm ET. At 2pm Nadex will calculate the expiration value of every one using the same weighted average of the last 25 prices of the Indicative Index (last column).

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Expiration Time in Binary Options

You will learn about the following concepts

  • What is expiration time
  • Strike time
  • Strike price
  • Expiry time alternatives
  • Expiry time extension
  • Early trade close
  • Double Up
  • Example

Expiration time

Expiration time marks the moment when the binary option expires. It basically determines how long after you’ve placed the trade, you’ll learn the outcome of your bet. Depending on the type of binary options you are trading and, of course, the type of your binary option broker, you may see different expiration times when placing a trade. After you have placed your bet and picked the expiration time, the only thing you can do is to wait for that time to come. When the option expires, the trading platform will assess the value of the asset and determine whether your position is in or out of the money.

Strike Time, Strike Price and Expiry Time Alternatives

There are several other terms that are closely related to expiration time. For example, when a trader places a bet, the hour at which the trade was placed is often referred to as strike time. The exact price of the asset at the execution time of a certain trade is called strike price.

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At this moment, the trader is supposed to predict both the direction of the assets price and pick the expiration time. For example, if the trader thinks that the asset’s price will rise, then they have to select the Call option. Conversely, if they think the price will go down, then they have to execute a put option.

Don’t forget that your broker may offer different expiry times for different types of assets. In most cases brokers will give you the opportunity to choose between hourly, daily and weekly expiry, but some brokers also offer 60-second options which allow you to quickly execute trades with an expiration time of just one minute.

Expiry time is one of the most important aspects of trade execution. The larger the expiration time, the more likely it is for the asset’s price to drastically change under the influence of market changes. Of course, this doesn’t necessarily mean that shorter expiration times are preferred – this entirely depends on the trader’s trading style and and his/her choice of analysis methods.

Trade extension

Some brokers allow you to extend your expiry time, also known as “rollover”, which is useful when you see that the underlying assets price is moving in the desired direction, but not fast enough, or it is not going well at all. This option will give your position a fighting chance to become “in the money”.

However, you will have a limited time to do so. Brokers typically open up a window lasting around 3-5 minutes to exercise this feature, which is usually shortly before the option expires. Also, you are typically allowed to extend your option only once for its entire duration.

Early trade close

Opposite to the expiry time extension, some brokers provide you with the opportunity to close your trade earlier than originally planned. Traders usually use this option when their trade is profitable and they are unsure whether it will remain like that. However, just like the trade extension, it comes with a limited time window – it becomes available 15 minutes before the expiry and lasts for 10 minutes. Also, brokers tend to charge a premium for this option which can amount to as much as 50% of the original payout.

Double up

Some brokers allow you to double your bet, in case you are feeling confident enough. The double-up option doubles your investment while keeping your current expiry time and direction. However, the entry rate will be updated to the current rate at the time the Double Up option was exercised. In exchange for our increased investment, we will logically receive the same rate of increase in profit, given the option becomes “in the money”.

Even if you choose not to use these options (rollover, early close and double up), all of them expand the range of trading decisions you can make and, thus, allow for more customization of your trading strategy. That is always a good thing.

Example

Let’s say that a trader has just bought a put option on the USD/JPY currency pair. The strike time is 13:30, the strike price is 99.15 and the expiration time the trader picked is two hours. This means that the trade will close at exactly 15:30 and the trader will find out if their trade will expire in-the-money or out-of-the money. If at 15:30 the price of USD/JPY is lower than the strike price, then the option will expire in the money and the trader will collect his/her winnings. Conversely, if the price is higher than 99.15, say 99.25, then the option will be out-of-the-money and the trader will lose the capital he had wagered.

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