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Binary Options are cash-settled as European-style options, meaning they can only be exercised on the expiration date. If, at expiration, the options settle in-the-money, the buyer or seller of the options receives a pre-specified dollar amount. Similarly, if the options settle out-of-the-money, the buyer or seller of the options receives nothing. This provides a known upside (gain) or downside (loss) risk assessment. Unlike traditional options, Binary Options provide full payout due to a single pip movement.
Despite the term “all or nothing”, depending on the actual trading platform, “nothing” can actually mean “something”. This means that at expiration time the owner of the option may actually get a certain payout amount, even if the option expired “out of the money”.
Very often you may encounter binary options under another name. In forex exchange market Binary Options are known under the name of digital options.
Learn the two outcome options. A trader of Binary Options needs to anticipate the expected direction of the price movement of the underlying asset. Unlike traditional options, knowing the direction of the price movement, as well as magnitude of the movement, is not required. If the investor has an opinion about an underlying asset and wants to places a trade, s/he can trade Binary Options.
Decide your position. Buy if you believe the market price will rise or the economic event will occur. Sell if you think the opposite. If your insight is correct, on the expiration date, your payoff is the settlement value of your contract.
Learn how the price is determined. The price of a Binary Option contract is equal to the probability of the event happening. For example, if the contract value has a value of 0 and the last trade of the contract was at .00, it is an indicator that 96% of the market believes that the event is going to happen and the contract will end up in-the-money.
Learn the advantages of trading Binary Options over Traditional Options.
Binary Options are generally simpler to trade because they require only a sense of direction of the price movement of the underlying asset, whereas traditional options require a sense of direction as well as the magnitude of the price movement.
Binary Options have controlled risk to reward ratio, meaning the risk and reward are pre-determined at the time the contract is acquired. Traditional options have no defined boundaries of risk and reward and therefore the gains and losses can be limitless.
Binary Options provide nearly all the trading and hedging strategies that are possible while trading traditional options. Binary Options maintain a level of trading sophistication and functionality.
Unlike a traditional option, the payout amount is not proportional to the amount by which the option ends up in-the-money. As long as a Binary Option settles in-the-money by even one tick (regardless of how much in-the-money it is), the winner receives the entire fixed payoff amount.
Binary Options offer contracts with short-term durations. In some markets, Binary Options contracts close multiple times throughout the trading day, while others may last as long as a quarter. This provides the trader with several investment opportunities and flexibility as markets change over time.
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