Understanding binary options premium is critical if you are trading binaries. The more time you have on a binary, the lower the premiums for entering and exiting. However, the less time you have until expiration, the more value the premium has if price is above the strike price.
Understanding Binary Options Premium
In this video, Gail Mercer, founder of TradersHelpDesk, shows you how fast the premium changes on a binary option that is almost at expiration. Then she compares that with a binary option that has a full two hours remaining.
As you can see in the video, the binary that has less than 10 minutes until expiration has a dramatic change in the binary options premium. The ATM strike has a premium of about $70 (ATM would normally be $50). As expiration approaches, the premium jumps up to over $80. This is typical for a binary that is approaching expiration.
On the other binary option, the one with almost two full hours, the premium is right at $50, as expected. Even if price moves above the strike, the premium will not increase in value like the previous binary did because there is a lot of time remaining. In other words, just because price moves above the strike, there is still a probability remaining that it could move back down since there is 1 hour and 59 minutes remaining.
Also, Gail shows how the binary options premium in the live account will typically have more value than the demo mode. This is important to monitor because if you are setting targets, the live account may hit the target but the demo mode does not or vice versa.