What are binary options
Binary options are a great financial instrument and are a great way how to make money on the Internet. It is easy to understand, comprehend and trade.
Binary options are just one of many option types. They are characterized by their simplicity as the value of maximum profit or loss is known to both buyer and seller beforehand. Word „binary“ means that on expiration date buyer gets either predefined profit or nothing at all.
Binary options can be traded on regulated markets but are usually unregulated, traded on Internet and prone to fraud. For example, American Trade Commission issued warning to investors regarding binary options.
Binary option types
The most important factors for every binary option trade type are strike price and time for which the option is considered valid - called expiration time. Investor therefore speculates whether the price of an underlying asset (gold, silver or company stock) at the end of the expiration time (i.e. in 5 minutes or 2 hours) will be higher or lower than at the beginning of the trade.
Almost always this involves call and put binary options.
CALL Binary Option
In this case the trader speculates and hopes the price will rise.
Example:
Trader makes a call trade at 12:00 for 1 hour (with 60 minute expiration time at 13:00) with price $1.2 per stock. The trade amount is $100.
Only two possible outcomes:
- At 13:00 the price is higher than $1.2 (i.e. $1.21 or $1.5) and the option expires IN THE MONEY. Thus the trader makes money. With returns of around 85 % trader could make $185 out of which $100 is the returned amount invested and $85 is pure profit.
The price is lower than $1.2 (i.e. $1.19 or $0.9) and the trader loses money. The amount invested ($100) is therefore not returned.
PUT Binary Options
In this case the trader speculates on the oposite. That the asset‘s price will drop.
Example:
Trader makes put trade at 15:00 for 1 hour (option with 60 minute expiration time at 16:00) with price $1.2 per stock. The trade amount is $100.Only two possible outcomes:
- The price is lower than $1.2 (i.e. $1.19 or $0.9) and the trader makes money. With returns of around 85 % trader could make $185 out of which $100 is the returned amount invested and $85 is pure profit.
- Price is higher than $1.2 (i.e. $1.21 or $1.5) and the trader loses money. The amount invested ($100) is therefore not returned.
More specific types of binary options
- High-Low: The most popular type (explained above) when trader speculates whether price of underlying asset will rise or drop during predefined time interval (before expiration time).
- One Touch: Trader speculates whether the price of an underlying asset will attack certain value during opened trade (before the option expires). The price does not need to be above the specified value. It only needs to touch the price value at least once. Therefore trade is much simplified and easier.
- No Touch: This type of trade is similar to One Touch. Trader speculates whether price will touch or exceed certain value during predefined time interval (before expiration date).
- Ladder: Buyer speculates whether price of underlying asset will be higher or lower than defined at expiration date. The resulting profit differs depending on price difference and moves between 1% and 500%.
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