The below is not stating you should trade any specific instrument. If choosing between verticals and nadex binaries then this may help. Its simply a comparison of the two based on comparison statements made in this thread.
Statement: A nadex binary price 0-100 can be derived using the same formula as the formula for a delta 0-100 is somehow magically automatically disassociating it with a vertical spread and therefore makes the pricing model invalid. True False
Statement: A simple and accurate pricing model on tiered Nadex binary contract is priced so as to match the delta of a call strike of the underlying instrument with the same expiration...True or False
Statement: Nadex binaries are nothing more than poorly priced verticals and someone should only do vertical ETF versus a binary on Nadex as Vertical ETF's are better "poor pricing structure of binaries" ...True or False
Statement: fees and spreads will kill you on binaries making it where you can't profit.. True or False
Evidence of the above statements : versus "I'm right, your wrong, your stupid, it can't be this simple cause I'm this smart, stop talking"
I definitely see how one could think binaries are priced like verticals. So cool I will go with that. However this is because of the fact that they are both using the black scholes model. If you want to... Just as I said if you know the delta of a call you could know a binary price. Can I give you a much more complex formula yes is it necessary will it make me a better trader helping me make more money -no..trying to price a vertical like a binary IMHO is a much more complex way to arrive at the same destination where it is much easier to price the delta of a call 0 to 100.... In either case... lets put the math down. on the comparison with some evidence....
However, the varying payout of a vertical requires maximum movement. Whereas a binary receives full payout if it is just 1/10 of 1 tick in the money at expiration to make 100% of profit potential. So it is not simply comparing a capped profit and risk binary option to another capped profit and risk payout vertical. Being the main difference is the Max payout on a binary if it expires ITM but a lower payout or even a loss on a vertical depending on where it expires in the range.
As shown here the binaries on Nadex whether ITM/ATM/OTM line up with the delta of the correspond call strikes on ES options that have the same expiration time - this is simple and accurate and has yet to be disproven and can be found in binary white papers and therefore can theoretically and practically be used to price a binary. For the best accuracy you would need to extract the IV based on the pricing as your X factor first. And then use that IV to help price them out. Yes there is skew etc.. so you would need to reprice as both time and IV change over time However, the same applies to call and put vanillas and verticals and bears oh my.... Simply change the model factoring in time to expiration, price in relation to strike movement, and potentially IV to obtain the delta and you could obtain what the price of a binary would be should the underlying move, iv change, and or time pass. If you think I am wrong. Great show one example any example that proves otherwise.
Comparing the SPY 175-175.5 binary to the 1754.5 spread (the challenge being and before it said...though similar they are not the same as one is based on the SPY and the binary is based on ES... but just for examples sake we will go with both being ATM)
This is referencing the post earlier (noted below - regarding a the binary price posted by drownpruf and the SPY verticals provided by SLE near the same time.
[/URL]
]http://content.screencast.com/users/Stephen08540/folders/Jing/media/fae73f45-82ad-4e85-9d69-ad2d645bbff9/2014-02-05_1722.png
This is best exhibited in this screenshot and explained a bit more detail below...
http://screencast.com/t/O2mVKmCpiPWN
Fees on Vertical
I assumed based on one of the brokers listed on this site that your commissions are 8.50 + .15 per contract (you did 2000 verticals (requiring a bought and sold call) so that is 4000 contracts x .15 + 8.50). Maybe you have a better rate but just to level out the playing field. Making your cost on just fees $608.50.
Fees on Binary
Fees are capped at $9.00 per order submitted (even if partial filled etc.. then later filled it will still be $9.00 so long as the order is not changed. So being .90 a contract once you do 10 or more contracts you fees will not exceed $9.00 on entry and $9.00 on exit for a total of $18
Fee Summary
Vertical Binary
$608.50 Versus $18.00
Exercise Risk & Impact on Fees & Paying Spread On Vertical
Since SPY has American Style options if the sold call is exercised you will be assigned short the SPY shares. (i know you know this just for other readers who don't).
So its important to know when doing the vertical on the vertical assuming say the market flies up you have excessive risk on the sold call which would most likely lead to you exercising the long call to cover the short SPY shares and avoid a "possible margin call" depending on the account size. Assume the cost is say $15.00 per strike. So you have potential $30 in fees but if this is done it would save you half the commission as most brokers at least the ones i use don't charge you both its one or the other. If you are not exercised upon you will probably (depending on your broker) not pay any fee on the sold option that expires OTM and if the long call expires OTM you will also not pay any commission to exit (depending on the broker). But if you hold to expiration to take profit you will deal with the long calls being excercised etc.. and have to deal with all that.
If both options settle OTM you will not pay bid/ask spread meaning it will not increase your cost
If both options settles ITM you will not pay bid/ask spread meaning it will not decrease your profit (saving you $4608.50 in spread) on a $100,000 notional position)
Exercise Risk on Nadex Binary And Impact on Fees and Spread Cost
There is no exercise risk to worry about or deal with. If it settles ITM it will cash settle.
If the binary settles OTM there is no fee so you will not pay the $9.00.
If it settles OTM you will not pay bid/ask spread meaning it will not increase your cost
If it settles ITM you will not pay bid/ask spread meaning it will not decrease your profit (saving you $6,000 in spread on a $100,000 notional position)
So what is most likely is if you are profitable (close to max profit say) you will close the position before expiration I am assuming. This would require you pay the bid ask spread
Advantages
If you hold it and it goes to max profit and you exercise it then you avoid paying the bid/ask spread as you are not paying to exit out of the trade as you are getting the Intrinsic value difference between what was paid and the (ceiling) assuming long) and only paying the exercise fee of $30 ($15 x 2 strikes) further saving you on commissions
The only advantage I can see of comparing a vertical to a binary is the slighly lower bid ask spread. Though this is defintely not always the case as just a couple strikes up or down and the bid ask spread no the vertical ie an OTM or ITM debit/credit spread can have substantially higher bid ask spread than a binary contract. Beyond that the advantage of full payout for being only 1/10th of a tick in the money, versus variable payout with full payout only occurring upon maximum movement at above the sold call (or sold put if a put vertical) (assuming debit for simplicity).
Further more the hours on the ETF's are limited so you can not adjust your position directly if there is an adverse move in the market after hours.
You pay higher fees on the ETF's . You are waiting a week on a trade or having to pay bid/ask spread versus doing shorter intraday, 8 hour, or 23 hour binary contracts. But if you like weekly the binary contracts still exist. Obviously you don't have to wait a week etc... but you do have to pay bid ask spread and substantially higher fees not do so versus collecting maximum intrinsic value.
Don't agree offer proof and evidence showing otherwise versus theoretical statements. Lets make this actually beneficial.
Statement: A nadex binary price 0-100 can be derived using the same formula as the formula for a delta 0-100 is somehow magically automatically disassociating it with a vertical spread and therefore makes the pricing model invalid. True False
Statement: A simple and accurate pricing model on tiered Nadex binary contract is priced so as to match the delta of a call strike of the underlying instrument with the same expiration...True or False
Statement: Nadex binaries are nothing more than poorly priced verticals and someone should only do vertical ETF versus a binary on Nadex as Vertical ETF's are better "poor pricing structure of binaries" ...True or False
Statement: fees and spreads will kill you on binaries making it where you can't profit.. True or False
Evidence of the above statements : versus "I'm right, your wrong, your stupid, it can't be this simple cause I'm this smart, stop talking"
I definitely see how one could think binaries are priced like verticals. So cool I will go with that. However this is because of the fact that they are both using the black scholes model. If you want to... Just as I said if you know the delta of a call you could know a binary price. Can I give you a much more complex formula yes is it necessary will it make me a better trader helping me make more money -no..trying to price a vertical like a binary IMHO is a much more complex way to arrive at the same destination where it is much easier to price the delta of a call 0 to 100.... In either case... lets put the math down. on the comparison with some evidence....
However, the varying payout of a vertical requires maximum movement. Whereas a binary receives full payout if it is just 1/10 of 1 tick in the money at expiration to make 100% of profit potential. So it is not simply comparing a capped profit and risk binary option to another capped profit and risk payout vertical. Being the main difference is the Max payout on a binary if it expires ITM but a lower payout or even a loss on a vertical depending on where it expires in the range.
As shown here the binaries on Nadex whether ITM/ATM/OTM line up with the delta of the correspond call strikes on ES options that have the same expiration time - this is simple and accurate and has yet to be disproven and can be found in binary white papers and therefore can theoretically and practically be used to price a binary. For the best accuracy you would need to extract the IV based on the pricing as your X factor first. And then use that IV to help price them out. Yes there is skew etc.. so you would need to reprice as both time and IV change over time However, the same applies to call and put vanillas and verticals and bears oh my.... Simply change the model factoring in time to expiration, price in relation to strike movement, and potentially IV to obtain the delta and you could obtain what the price of a binary would be should the underlying move, iv change, and or time pass. If you think I am wrong. Great show one example any example that proves otherwise.
Comparing the SPY 175-175.5 binary to the 1754.5 spread (the challenge being and before it said...though similar they are not the same as one is based on the SPY and the binary is based on ES... but just for examples sake we will go with both being ATM)
This is referencing the post earlier (noted below - regarding a the binary price posted by drownpruf and the SPY verticals provided by SLE near the same time.
]http://content.screencast.com/users/Stephen08540/folders/Jing/media/fae73f45-82ad-4e85-9d69-ad2d645bbff9/2014-02-05_1722.png
This is best exhibited in this screenshot and explained a bit more detail below...
http://screencast.com/t/O2mVKmCpiPWN
- The fees are substantially lower on Nadex binaries in comparison to the vertical.
- The bid ask spreads are in fact higher on the binary in comparison to the vertical. In both cases you don't pay the bid ask spread if held to expiration. So in comparing to holding to expiration the bid/ask spread is void.
- The fees will be lowered on the verticals if exercised versus closing before expiration.
- Exercise risk exist on the verticals but not on the binaries.
- Despite the higher spreads combined with the lower fees the binaries versus verticals, binaries easily surpasses that of the vertical spreads in profit in all price movement ranges due to a binaries all (in the money by 1/10th of 1 tick) or nothing payout (OTM) versus a variable payout at best on a vertical and a nothing payout if it expires OTM
- Bottom line in all cases more can be made using the binaries than that of the debit spread on a buy to expiration comparison
Fees on Vertical
I assumed based on one of the brokers listed on this site that your commissions are 8.50 + .15 per contract (you did 2000 verticals (requiring a bought and sold call) so that is 4000 contracts x .15 + 8.50). Maybe you have a better rate but just to level out the playing field. Making your cost on just fees $608.50.
Fees on Binary
Fees are capped at $9.00 per order submitted (even if partial filled etc.. then later filled it will still be $9.00 so long as the order is not changed. So being .90 a contract once you do 10 or more contracts you fees will not exceed $9.00 on entry and $9.00 on exit for a total of $18
Fee Summary
Vertical Binary
$608.50 Versus $18.00
Exercise Risk & Impact on Fees & Paying Spread On Vertical
Since SPY has American Style options if the sold call is exercised you will be assigned short the SPY shares. (i know you know this just for other readers who don't).
So its important to know when doing the vertical on the vertical assuming say the market flies up you have excessive risk on the sold call which would most likely lead to you exercising the long call to cover the short SPY shares and avoid a "possible margin call" depending on the account size. Assume the cost is say $15.00 per strike. So you have potential $30 in fees but if this is done it would save you half the commission as most brokers at least the ones i use don't charge you both its one or the other. If you are not exercised upon you will probably (depending on your broker) not pay any fee on the sold option that expires OTM and if the long call expires OTM you will also not pay any commission to exit (depending on the broker). But if you hold to expiration to take profit you will deal with the long calls being excercised etc.. and have to deal with all that.
If both options settle OTM you will not pay bid/ask spread meaning it will not increase your cost
If both options settles ITM you will not pay bid/ask spread meaning it will not decrease your profit (saving you $4608.50 in spread) on a $100,000 notional position)
Exercise Risk on Nadex Binary And Impact on Fees and Spread Cost
There is no exercise risk to worry about or deal with. If it settles ITM it will cash settle.
If the binary settles OTM there is no fee so you will not pay the $9.00.
If it settles OTM you will not pay bid/ask spread meaning it will not increase your cost
If it settles ITM you will not pay bid/ask spread meaning it will not decrease your profit (saving you $6,000 in spread on a $100,000 notional position)
So what is most likely is if you are profitable (close to max profit say) you will close the position before expiration I am assuming. This would require you pay the bid ask spread
Advantages
If you hold it and it goes to max profit and you exercise it then you avoid paying the bid/ask spread as you are not paying to exit out of the trade as you are getting the Intrinsic value difference between what was paid and the (ceiling) assuming long) and only paying the exercise fee of $30 ($15 x 2 strikes) further saving you on commissions
The only advantage I can see of comparing a vertical to a binary is the slighly lower bid ask spread. Though this is defintely not always the case as just a couple strikes up or down and the bid ask spread no the vertical ie an OTM or ITM debit/credit spread can have substantially higher bid ask spread than a binary contract. Beyond that the advantage of full payout for being only 1/10th of a tick in the money, versus variable payout with full payout only occurring upon maximum movement at above the sold call (or sold put if a put vertical) (assuming debit for simplicity).
Further more the hours on the ETF's are limited so you can not adjust your position directly if there is an adverse move in the market after hours.
You pay higher fees on the ETF's . You are waiting a week on a trade or having to pay bid/ask spread versus doing shorter intraday, 8 hour, or 23 hour binary contracts. But if you like weekly the binary contracts still exist. Obviously you don't have to wait a week etc... but you do have to pay bid ask spread and substantially higher fees not do so versus collecting maximum intrinsic value.
Don't agree offer proof and evidence showing otherwise versus theoretical statements. Lets make this actually beneficial.
