Strike is an essential concept in Nadex binary forex options. In simple terms, it refers to the price at which the option is exercised. When trading Nadex binary options, traders choose a strike price, which determines the potential payout and risk. Understanding how strike works is crucial for success in Nadex binary forex options trading.
What is a Nadex Binary Option?
A Nadex binary option is a type of derivative that allows traders to speculate on the direction of a financial asset’s price. Nadex offers two types of binary options: call options and put options. With call options, traders bet that the price of the underlying asset will rise above the strike price before the expiration date. With put options, traders bet that the price of the underlying asset will fall below the strike price before the expiration date.
What is Strike?
Strike is a predetermined price that the option is exercised at. When trading Nadex binary options, traders choose a strike price that aligns with their predictions about the direction of the underlying asset’s price. The strike price determines the potential payout and risk for the trader. If the price of the underlying asset is above the strike price for a call option or below the strike price for a put option at expiration, the option is considered “in the money” and the trader receives a payout. If the price of the underlying asset is below the strike price for a call option or above the strike price for a put option at expiration, the option is considered “out of the money” and the trader loses their investment.
For example, suppose a trader believes that the price of the EUR/USD currency pair will rise above 1.1200 by the expiration date. The trader can buy a call option with a strike price of 1.1200. If the price of the EUR/USD is above 1.1200 at expiration, the option is “in the money” and the trader receives a payout. If the price of the EUR/USD is below 1.1200 at expiration, the option is “out of the money” and the trader loses their investment.
Strike and Payout
The strike price plays a crucial role in determining the potential payout for a Nadex binary option. The payout for a binary option is determined by the difference between the strike price and the price of the underlying asset at expiration. The further the price of the underlying asset is from the strike price, the higher the potential payout. However, this also increases the risk for the trader.
For example, suppose a trader buys a call option with a strike price of 1.1200 on the EUR/USD currency pair. The potential payout for the option is $100 if the price of the EUR/USD is above 1.1200 at expiration. If the price of the EUR/USD is 1.1250 at expiration, the trader receives a payout of $100. However, if the price of the EUR/USD is only slightly above the strike price at expiration, the payout will be lower. If the price of the EUR/USD is below the strike price at expiration, the trader loses their investment.
Strike and Risk
The strike price also determines the risk for the trader. The closer the price of the underlying asset is to the strike price, the higher the risk for the trader. This is because the option is more likely to expire “out of the money” and the trader will lose their investment.
For example, suppose a trader buys a call option with a strike price of 1.1200 on the EUR/USD currency pair. If the price of the EUR/USD is at 1.1205 at expiration, the option is “out of the money” and the trader loses their investment. However, if the price of the EUR/USD is above 1.1200 at expiration, the option is “in the money” and the trader receives a payout.
Conclusion
In conclusion, strike is an essential concept in Nadex binary forex options trading. It refers to the price at which the option is exercised and determines the potential payout and risk for the trader. When trading Nadex binary options, traders choose a strike price that aligns with their predictions about the direction of the underlying asset’s price. Understanding how strike works is crucial for success in Nadex binary forex options trading.
