Short attention span trading: 20-minute option use surges

Trader on the floor of the New York Stock Exchange.
Brendan McDermid | Reuters
Trader on the floor of the New York Stock Exchange.

In just one week, options contracts with an expiration of 20 minutes have become the second most popular offering on trading platform Nadex, as investors seek faster and faster gratification.

The contracts were launched last week with little fanfare by Nadex, the leading provider of binary options in North America. The company offers options with many durations and did not expect the tremendous level of early interest it's seen. Hourly contracts remain the most popular kinds of options on the company's platform.

Twenty-minute options account for 15 percent of total volume on Nadex today. These extremely short-term options are available for trading on the S&P 500, Russell 2000 and Nasdaq 100 Index futures, as well as Dow Jones Industrial Average futures.

"This is trading," said Nadex CEO Tim McDermott. "The 20-minute contracts offer great opportunities."

Binary options differ from vanilla options because they have only two outcomes: a fixed amount or nothing. Such yes/no bets aren't prevalent on the major U.S. options exchanges because of their risk profile and lack of popularity to date.

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Critics argue these kinds of options, especially ones with such short time horizons, amount to little more than buying a lottery ticket and have no basis in the fundamentals.

"I can't think of a single reason why I would trade this product," said Dan Nathan, an options trader and creator of RiskReversal.com.

McDermott's response: "You can't trade your lotto ticket."

A strange but compelling reason to buy stocks next year
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The overall binary options market is growing at a faster pace than the rest of the options market. Nadex traded 3 million contracts so far in 2014, already more than the 2.3 million done in all of 2013 by the site. Overall, options trading is up 5 percent in 2014 over last year, according to Options Clearing Corp.

"We really saw the levels of trading in our two-hour binaries increase in the last two minutes of their life, so that's why we created the 20-minute contract," said McDermott. He said he sees continued growth for his company, especially as such options become better known in the U.S.

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Binary options are more commonplace in the United Kingdom and the rest of Europe.

In the United States, many binary options are offered on the Internet without regulatory oversight. The Securities and Exchange Commission and Commodity Futures Trading Commission have warned investors about fraud by some of those sites. Chicago-based Nadex is regulated by the CFTC.