In its most simplistic overview, a Binary Option is a form of speculative futures trading whereby the payoff is either a pre-agreed amount or nothing at all. This dual outcome is the reason the term “Binary” is used. Binary Options can be applied to a broad number of assets including Commodities, Stocks, Indices and even Currency Pairs.
The main prerequisite required by these assets is that their values fluctuate constantly throughout each trading day. This is important as you never actually buy an asset when you purchase a binary option, you are simply making a speculative investment on an assets behaviour over a set period of time.
Binary Options have gained much popularity in recent years due to their simple up/down nature, the low cost required to participate and the increased number of online brokers offering services to the public. They are now more accessible than ever, and provide an incredible opportunity for traders to earn vast profits in as little as 30 seconds.
Each form of trading has its own set of common terms and phrases. We have collected a number of Binary Options examples here to provide you with some insight the most popular expressions.
Pip – This is an acronym for “Percentage In Point”. The value of a currency pair is usually presented at up to five decimal places such as, 1.75164. A Point is 1 number to the left of a decimal and a pip is represented as the lowest value to the right of the decimal. In this example, it would be the number 4. Other assets in Binary Options are measured in terms of pricing (e.g. cents and dollars).
Call Option – This is the name given to an investment that is predicted to increase in value at the time of expiry. A profit can be made here by your asset value increasing in value by even one Pip or cent over its Strike Price.
Put Option – This is the opposite of a Call Option, and refers to an investment that is predicted to decrease in value at the time of expiry. A profit can be made here by your asset value decreasing in value by one Pip or cent over its Strike Price.
Strike Price – This is the price of the underlying Binary Option asset at the time of purchase. When an option expires, it is compared to the Strike Price to determine if the closing price has gained in value (In The Money), or lost value (Out The Money).
In the Money – An option is referred to as In The Money if it has gained value/paid out on expiry. This can refer to both Call Options and Put Options. A Call Option will be In The Money if the value of the asset is higher than the Strike Price on expiry. Similarly, a Put Option will be In The Money if the value of the asset is lower than the Strike Price on expiry.
Out of the Money –This is literally stating that you have lost the trade. The dualistic win/lose nature of Binary Options means that winning and losing your investment is equally possible. A Call Option will be Out of The Money if an asset is lower than the strike price on expiry. A Put Option is Out of The Money if an asset is higher than the strike price on expiry.
At the Money – A very rare occurrence in the ever-changing financial markets is when an option equals the market price of the underlying security at the time of expiry. This is neither a win or a loss and your investment will normally be returned to you.
Types of Binary Options Trades
There are a number of variables that all traders should consider before making an investment, but a Binary Options trade is normally no more than three simple steps, assuming you have a trading account and have picked an asset with which to trade with.
High/Low Options (aka: The Standard Binary Options Trade)
- Select a Call (High) or Put (Low) prediction
- Enter your Investment amount and select an expiry time
- Click “Invest”
Various payouts percentages will be offered to traders depending on their choices of expiry times and investment amounts. Once a trade is made, it’s simply a waiting game until your pre-determined expiry time, and then you will know if you are In the Money or not.
There are several, more advanced Binary Options trading methods available to traders. These use the basic format shown above, but contribute towards more sophisticated Binary Options strategies.
- Short Term Options – This is the collective term used to describe options that expire in 5 minutes or less, and are some of the most traded Options. These can include an expiry in 30 seconds, 60 seconds, 2 minutes and of course, 5 minutes. These options are typically used to trade around breaking economic events and news stories. Short Term Options are hugely popular, but can be tricky and require an understanding of Fundamental Analysis.
- Touch Options – The markets have a nature to consolidate and this provides trend patterns. Traders can analyse and use these to make educated assumptions on the prospective future values of an asset. This is where Touch Optionscome in. They tend to have three sub-options; Touch, No Touch & High Yield Touch.In a standard Touch Option, Traders select a specific value that an asset must reach within a specified period of time. This value is called a Trigger. A standard High/Low Option only expires at the pre-set expiry time. A One Touch Option will expire as soon as the Triggeris reached, automatically closing an Option In The Money.In the case of the No Touch Options, you may select the same Trigger, but you are now investing on the assumption that your asset will NOT to reach the Trigger value by the pre-set expiry time. If you are correct, you will earn the pre-agreed return.A High Yield Touch Option is very similar to the standard High/Low Options, except you are offered a very aggressive fixed return, such as 350% of your investment, if your asset reaches its target value and you’ve speculatively invested correctly.Dependent on the broker, the Touch, No Touch, and High Yield Touch Options may provide traders with the opportunity to exit an option early if the price goes against them.
- Boundary Options – These are also known as Range Options. When trading Boundary Options, a binary options asset is given two target prices in relation to the strike price/market price. The first price will be higher than the strike price and the second price will be lower than the strike price, thus providing a Range or Boundary.A trader must now select if the asset will finish In or Out of that given range, within a predetermined time frame. These options can usually be closed early, and should you do so whilst in the correct range to be In The Money, you will not get the full pre-agreed payout, but most brokers will provide some form of a return. Traders can usually find a High Yield Boundary Option with most traders.These work exactly like a normal Boundary option, but offer a very aggressive payout and a very strict boundary, making these high yield options highly tempting, and challenging in equal measure.