Understanding the Delta on Binary Option is fairly simple. Basically, the risk can be viewed as the “Delta”. Below is an example of how the Delta can be identified using strike prices and risk on Nadex Binary Options.
Understanding the Delta on Binary Options
The 60-minute EURGBP chart is below and has 3 yellow lines that correspond with the risk associated with buying the EUR/GBP binary option. The available strikes and risk are:
- .7960, risk $30
- .7940, risk $47
- .7920, risk $65
Price is currently trading at .7933. The binary signal for the EURGBP is Buy at .7929.
The appropriate strike price for this signal is the .7920 with $65 of risk. The risk is higher if buying this strike price because it is already “in-the-money” or about thirteen pips above the strike price. The .7940 strike is the “out of the money” option as the current price has not yet arrived at that strike level. The .7960 strike is even further “out of the money”.
The closest strike price to a Delta 50 is the .7940 but it would require the trader to go out of the money. The closest strike to a Delta 70 is the .7920 strike and is already in-the-money.
Which Delta to Choose?
So which is the best option to choose? Depends on the trader and what he is willing to risk. Quite often I find that waiting for the signal to reach the Delta 50 area is best for me. Since the prices are ever-changing and the option available is the 11am expiration, there is time to wait (unlike a 2-hour binary where time is more restricted).
In this case, price does come back to the .7920 strike, making it a Delta 50. For Delta 50 traders, this is the optimal place to buy. Then if you look at the charts, you can see it has two levels of support — one on the 120-minuteminute chart (average true range stop indicator which is the plus sign on the chart) and the 60 minute which also shows a congestion dot below the TradersHelpDesk Average True Range Stop indicator.
Understanding Gamma in Binary Options
However, the Delta is not the only Greek that matters. In this case, the Gamma is low — meaning the price changes very slowly as the expiration is about 4 hours away. The closer expiration gets, the higher the Gamma gets (meaning a faster pace in the change of price). By 8am, price was trading at .7904, yet the price of the binary only decreased by about $10. If the trader is using Nadex Binary Options, he has a choice — close the position for a minimal loss or maintain the trade. Since typical price action is that price will change the ATR from blue to red BUT when that happens, price will normally go back and test the new ATR for resistance or support (depending on whether the ATR is above or below price). That is exactly what happened on this signal.
Knowing that price would more than likely (this is the edge) go back and test the ATR, I held the position. Shortly after the opening, price did go back up in search of resistance (typically the ATR area which was also well above the strike signal). In this case, the Gamma was working for me because price was above the strike and even one increment can make a big difference. By 10:19 am my profit target was achieved with only a ten pip difference between the strike and current price.