How A Nadex Binary Is Impacted By Implied Volatility

Implied Volatility can impact the price of an option more than any other factor.

Implied Volatility is a fancy word for expected move. The longer there is until expiration the more time there is for the market to move. This is why a binary  will be worth more the longer there is till expiration.

In addition, before news events "implied volatility" increases the premium cost of the binary as a large move is expected to take place. For example a binary with 2 hours to expiration before the FOMC or NFP report a binaries premium will be closer to $50 than it would be at midnight when no news is expeted within the next two hours and when expected movement is normally low. If you bought a OTM binary strike both above and below the market several hours before a news event you may see both sides be profitable even though the market has not moved and time has passed. This is due to the expected movement flooding into the options market and causing the premium to rise.

Understanding how implied volatility impacts the price of a binary option by time and by pending government news events can help a trader know whether they should pay or collect premium to take advantage of the rise or fall in the implied volatilty impacting the binaries price. 

A simple illustration can be seen in the same phenomenon on stock options before a earnings release. The implied volatility gets sucked out of the binary after the release has happened. Even more premium is removed when there is little movement after a large expected move. This is known as a volatility crush. Notice the highlighted example below that shows the how implied Volatilty for options on AAPL rose before the earnings annoucment. There was a large expected move with the earnings annoucment caused the demand for the options to rise and the price that traders where willing to pay. Then after the earnings annoucment happened, whether there was a big move or not in the price of the market, the implied volatlity dropped causing a dramatic decrease in the premium built into the option.

To see examples of trading on Nadex binaries and spreads, see these articles posted on Benzinga, click here.

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