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BINARY CODES Binary Code A binary code is. The Greek that measures an option's time decay is called theta. It is the passage of time that is the key to premium collection. Options are known as a "wasting asset" because they have a time limit identified by the expiration date.

Having a wasting asset means that each day you own an option, you lose a certain amount of money due to time decay. Moreover, every option has a different rate of time decay, or theta. It is theta that is going to play an important part in choosing which strategy or specific option to use in a certain strategy. Every day that goes by, an option loses money due to decay. Each day, this decay hurts us just a little bit more. It can get to the point that—if we wait too long for an option to perform—any gains we might make from the movement of the underlying security or implied volatility may be offset by the loss in value we had already accrued in time decay, as described for us by theta.

Additionally, it's very important for option traders to realize that, when talking about option prices, premium or price consists of two types of values.

The first of the values is intrinsic value, which is the amount by which an option is in-the-money. We've talked about options that are in, at, or out of the money before, but for today's discussion, here is what you need to know when choosing which options to trade that best fit the strategy you're using.

In-the-money options are the only options with intrinsic value, and intrinsic value does not decay. The other value component of option premium price is extrinsic value and this element of value is all about time decay. It is extrinsic value that decays to zero over the period of the option. If you are short an option or want to sell an option to try to take advantage of premium collection, you must understand theta.

You need to know, and be aware of, which options are going to have the most amount of extrinsic value and which options are going to decay the fastest.

If you are collecting premium, you want to try to collect as much premium as feasible, and then have the value of the option decay as fast as possible. If you have a theta of 0. It is also very important to know that theta does not decay in a linear fashion. In other words, as the option approaches the day mark until expiration, the rate of decay starts to accelerate.

For example, the 2. The extrinsic value starts to evaporate rapidly and reaches zero at the end of expiration day. That is, the option no longer has worth once it has expired. Keep in mind that most out-month options i. This means that selling out-month options is not a good strategy for premium collection. In this example below, the spread price is 23 ticks below where the underlying Crude Oil market is trading.

This is an example of an inverted proximity on the price of the spread. So effectively, if you bought this spread, you would be buying it 23 ticks below the underlying market. Premium collection with binary options you find a spread close enough to the ceiling on a buy, look for your price proximity to be below the underlying market price. To view image click HERE.

If the market goes down slightly you can still make money, depending on how far it declines. Effectively, if it moves down 23 ticks you would break even. Collecting premium means that, if the market does not move oe moves slightly against you, or moves in your favor, premium collection with binary options , you can potentially be profitable. Therefore, if the CL futures premium collection with binary options priced at This would be a 5 percent return on investment in a single day, if the market simply stayed flat, premium collection with binary options.

The more it moves up, the more potential profit you could make. This could yield a 12 percent return on investment in a single day, if the market moved in your favor by about premium collection with binary options ticks, as of expiration. The first thing you may notice on spreads is that they show a higher max risk when you are doing a premium collection trade.

However, the focus should not be on max risk when doing premium collection. The focus is on where to get out in case the market moves against your position. The more time passes, the more premium will decay and the further the market could move against you in order to be at breakeven. It may move eventually to a point of 23 ticks against you when there is no premium, as of expiration.

If the market were to settle against you by 46 ticks, that would still allow you to be trading in a risk to reward scenario, but where 3 of 4 possibilities could happen and you could still be profitable. Also, it is important to remember not only can you exit to limit loss before expiration, but you can also exit at any time you are in a profit. For instance, as time passes, even if the market stays flat or moves down some or even faster, if the market moves up, you can exit in order to limit your losses.

There are times when premium collection trades work well for deep in the money trades. This can be true for spreads that have already gone into profit and are close to their ceilings and premium collection with binary options times of flat markets, premium collection with binary options.

Consider this strategy for uptrends. We will cover doing this strategy in downtrends in the next article. After that, the third article in this series will be on how to collect money on both sides of the market enabling you to increase your profit in a strategy called an iron condor. Planned correctly, the iron condor can be a great strategy for news trades to collect premium on implied volatility, during lower volatile times when there is a decent amount of time until expiration and in a variety of other ways.

To learn more about how to trade binary options in-depth and for binary options signals, trading strategies, tools and trade rooms see ApexInvesting. Benzinga does not provide investment advice.

Risk Disclaimer Trading on Nadex involves financial risk and may not be appropriate for all investors. The information presented here is for informational and educational purposes only and should not be considered an offer or solicitation to buy or sell any financial instrument on Nadex or elsewhere.

Any trading decisions that you make are solely your responsibility. Past performance is not necessarily indicative of future results. Nadex contracts are based on underlying asset classes including forex, stock index futures and commodity futures. Trading can be volatile and investors risk losing their investment on any given transaction. However, the design of Nadex contracts ensures investors cannot lose more than the cost to enter the transaction. Nadex is subject to U. regulatory oversight by the CFTC.

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