Binary options are one of the simplest forms of trading. Using ‘all or nothing’ strategies, ‘cash settled’ options are finalized on the date they expire. At the expiry point, they are either resolved with a profit ‘in-the-money,’ or ‘out-of-the-money’ where the buyer or seller doesn’t receive a pay-out. Binary options are also commonly referred to as ‘digit option trading.’
What is Binary Options Trading?
Classified as ‘exotic options,’ binary options are relatively simple to understand. The most basic form is a ‘high-low’ option. These are also referred to as fixed-return options when the high-low binary involves commodities, stocks, foreign exchange, and indexes. The expiration date is called the ‘strike price.’ When a trading wager is on the right side of the strike price at the moment of expiry, the trader will receive a fixed return no matter how marginal the movement of the instrument. Conversely, when the wager does not correctly identify the direction of the market, the trader stands to lose the outlay.
Binary Options – ‘Put’ and ‘Call’
Almost all platforms refer to the two binaries as ‘put’ and ‘call’ options. The ‘put’ refers to a decline in price whereas the ‘call’ indicates an increase. Binary trading options differ from traditional trading because it isn’t necessary for traders to recognize the degree of movement. What is required is the ability to accurately predict if the expiry price will have risen above or fallen below the starting price.
How Binary Option Trading Works
It’s easy to see that binary option trading is not complex. The skill is in being able to accurately predict the movement of an asset. When the trader believes that the basic asset will increase in value, he or she will purchase a ‘call.’ If the value is predicted to fall, the trader will select the ‘put.’ When trading binary options, the pay-out, price, risk, and expiry will be revealed at the beginning of the trade. Generally, trades that take place outside of the U.S. will include a strike price that reflects the present rate or price of a financial asset. Hence the binary options trader will place a wager based on whether or not the predicted price will be above or below the existing price at the time of expiry.
How to Make a Trade
Trade are made in three simple steps. First the trader will choose which asset to trade: stocks, currency, indexes, or commodities. Next the trader will either ‘call’ or ‘put’ depending on the prediction for that asset. Finally, the amount of the trade will be determined and applied.
Different Types of Binary Options
The standard high-low type of binary option is described above and it’s helpful to understand that this is the most common form for binary option trading. Most international brokers, aside from the United States, provide a variety of other binary options. ‘One touch’ and ‘range’ binaries are examples of different kinds of binary options that you may want to learn about.