What Are Binary Options?

What Are Binary Options?

What Are Binary Options? A binary option, sometimes called a digital option, is a type of option in which the trader takes a yes or no (up / down or Call / Put) position on the price of a stock or other asset, such as ETFs or currencies, and the resulting payoff is all or nothing. Because of this characteristic, binary options can be easier to understand and trade than traditional options. In binary option a trader has to bet on any one out of two options ‘buy/sell’ basis two definite outcomes whether an underlying asset price will rise or fall in the near future, for which a trader will earn fixed amount if bet worked in his favor.

Binary options are also called as digital options, all or nothing options, one touch options, fixed return options and bet options.

DESCRIPTION: Binary options underlying base is compulsorily cash only settlement on the date of expiry of an option. This works on the same lines like European style option. These options have a fixed payout for a trader, which has a maximum time limit considering the difference between the purchase date and exercise date of an option. An option automatically exercises or expires on the said date and it can’t be carried out on next expiry date, and the option holder can’t buy or sell the actual security. Binary option holder just bets on a proposition whether certain security price will rise or fall in future date basis that he/she buys/sells certain kind of option either call/put. If trader sees bullish trend then binary call option if bearish then binary put option.

These are important elements to any binary option:
1) Cash settled
2) Put/call option 3) Expiry Date 4) Underlying Asset and its price 5) Settlement Price

Binary options are normally found in two formats,

Either cash or nothing binary options where trade is done on fixed amount i.e. if an option expires ‘in the money’ then option holder will get fixed cash amount on which particular trade was entered on, if ‘out of the money’ then zero cash.

Or asset or nothing binary options where trade is done asset value i.e. if an option expires ‘in the money’ then option holder will get amount equivalent to the market value of an underlying on which particular trade was entered on, if ‘out of the money’ then zero value.

Examples:

A trader thinks the Reliance Industries stock will touch Rs 950 in a month’s time. Through a broker, who deals in binary option, he buys a ‘cash or nothing’ binary call option of RIL with fixed a binary payoff of Rs 500. Now, he buys one lot of one month call option at strike price of Rs 950, which is expiring on Nov 27. Now on the expiry date i.e. Nov 27, RIL shares close at Rs 955, which means the option expired ‘in the money’. So the trader will receive Rs 500. Had the stock closed below Rs 950, the option holder would have received no money.

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One Response to “What Are Binary Options?”

  1. hey, very good post, but could you write a post on how binary options brokers make there profits am interesting in investing in a broker but i need to know how they make their profits fist

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