Binary options, which are priced as above or below options, have the most value to the client when they are purchased with as little time left before expiration.Since most binary options that are listed as above or below options have a strike price that changes as the underlying price changes, a client should consider the timing of their purchase.
Most above or below options are priced with an hour or 2 hours until expiration at the current price of the underlying asset. For example, when the S&P 500 Index is trading at 1100, the above or below option will have a strike price of 1100 and an options dealer will offer an above or below option at 1100. The payout is usually stable at levels close to 80%, and the strike price will fluctuate around the underlying price until it is locked. The dealer of the binary options will slightly change the payout to levels that are lower than 80% as the risk they are taking from additional investors increases to one side or another.
The price of the option is usually locked 15 minutes prior to the actual expiration of the binary option. This means that trading in that particular binary, is closed, while the dealer and the client wait while the underlying market is fixed. This occurs so the dealer will avoid having to price a binary option immediately prior to the expiration of the option. The period, right before expiration of a binary option is when the risk on a binary option is the greatest. This occurs, because a very small move in the underlying price of an instrument can cause an option to be in or out of the money. For example, if an 1100 S&P 500 above option is trading at 1100 45 minutes before expiration, a 1 point move will not greatly affect the price of the option, but with 3 seconds before expiration, a 1 point move will either bring the option in the money or completely out of the money.
When trading standard options, there is more value in trading the options that have a lot of time value in them. The longer the tenor of the options (30 days compare to 1 day), the more valuable the option. The value of the option is based on the ability of the trader to gain value by delta hedging the option, or potentially buying and then selling an option (or the reverse). With time sensitive binary options, the volatility that is associated with the underlying market works against the purchaser of the option. Since a purchaser of a binary option is only looking for a small move above or below the strike price the best was to trade this type of option is to minimize the amount of time that is left prior to expiration. Since most above or below binary options freeze the trading 15 minutes prior to the expiration of the option, a savvy purchaser should look to buy or sell as close to the 15 minute market as possible. (This assumes there is not an economic or fundamental release during the period of the option that the investor wants to take advantage of).