Binary Options: Strategies for Directional and Volatility Trading

CHAPTER 5

Settlement

Now that we covered collateral and looked at what your maximum losses are, let's look at what happens when you win on your binary options trades. Unlike stock options, binary options are never exercised. Due to the binary nature of the options, they are simply settled at either $0 or $100 at expiration.

Regardless of whether you buy or sell a binary option, if you are correct at expiration, your account will be credited $100 (settlement) per contract. If you are incorrect, you will get nothing.

When your trade settles at $100, your account gets credited very shortly after expiration and you will receive an e-mail notifying you that your trade was settled. Now let's look at the logistics of how a long and short binary options trade will settle.

SETTLEMENT ON BINARY OPTION LONG TRADES

If the condition for the option that you purchased is true at expiration, you will receive revenue of $100 per contract at settlement. Conversely, if this condition is false, you will receive nothing. For example, let's assume that the Standard & Poor's (S&P) futures were trading at 1280 when you entered your trade and you purchased a $1300 option for $30. If the price of the S&P futures is above 1300 at expiration, the option will settle at $100 and you will earn $70 on your $30 investment per contract or 233%. If, however, the S&P futures remain below 1300, the trade will settle at $0 per contract and you will get nothing and simply lose your $30 investment per contract.

Let's ...