Fair enough, mbey I didn't explain myself properly. I'm aware that binaries have different strikes / target prices, so they can generate more than 100% return. I was talking about binaries that would have their profits capped at 100% compared to an exchange option that would have no caps on its profit. Mbey I've got my definition wrong. I thought that binaries are setup so that you recieve $$ based on whether the price either a) hits the target, b) is above the target price at expiry. So if its above the target price at expiry then the Binary would be capped @ 100% compared to the exchange option which would result in a higher return (in the event the market throws a hail Mary). So getting back to what Lucy said, for eg, I find it difficult to understand why som1 would sell their car to 1 buyer for 1K compared to some1 else offering them 10K.
I think you misunderstand how binaries work. Your payoff (on Nadex for example) is always $100 if you "win" and $0 if you "lose". The price you pay for the option is determined by supply and demand. If there's not much chance of the index being above the strike you may pay as little as $1 for the option to get $100. In which case your max profit is capped at 100X. If you bought the option for $50 (which would be the case if the index is currently trading right below strike) your max payout would still be $100 or 2X. If you want to compare it to regular options its much more like a spread, and like a spread you'll pay much less for it than for something with an uncapped upside and the same strike. This serves a purpose for some strategies and not for others, however a vanilla option is not universally "better" than a binary option, unlike buying the same car for $1K vice $10K. It's a tortured analogy, but to run with it, a binary is more like paying $1K for a Camry sight unseen that may be in mint condition or may need repairs that cost more than it's worth, vice paying $10K for a BMW sight unseen that may be in mint condition or may need repairs that cost more than it's worth. You pay more for the BMW option because it could pay out more, just like you'll pay more for a vanilla option than a binary of the same strike.
Another key thing to point out with binaries, you are not really controlling anything and do NOT have the option to exercise the binary option to buy or sell the underlying the way you do with regular options.
A binary is option is basically a vertical option spread. So it in essence very similar to vertical option spreads but with super short maturations.
Anyway that was my thoughts. Thanks for analogy Sig, I figured that the options would have a different price from the exchange ones. If its all calculated correctly I guess you can't argue with that. I'd still prefer taking the full profit that I could get from the option / trade. I think I don't like them because of all the things that bucket shops do to their customers. I'm not that thrilled about the "spread" either. If the correct price of the option is the Mid of the spread then that is what I want to pay.
NADEX is liquid enough for any ATM bet that you're placing. I pike around often on the 5-minute FX bets (as I posted earlier) and routinely see a spread of 2-2.5/contract. Is that amazing? No, it's still shit, but it's better than 12-15 wide like you'll see during the quieter hours. These things move so quickly (regardless of their duration) that you're likely to get the fill inside the spread if you leave the limit order in. the platform is such shit and I was not happy when they pulled their Pro platform that was desktop-based... no idea why they did that. anyway, none of that matters as long as you're right on the direction.
SPX options settle into cash but do not trade at a discount to ES, SPY, or IVV options. While you may personally value expiration into the underlying, the market clearly assigns no value to it (and in fact can't because otherwise it would be a no risk arbitrage opportunity).
Just opened a Nadex account after seeing it mentioned here and checking it out, put a tiny amount in there, been having a lot of fun playing with it. Just play money though, haven't had enough time to look into it much, just a few trades here and there.
cool, yeah NADEX is a good way to start and build up. I believe the CME offers some binaries as well but I haven't looked into what they are.