What are binary options?

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What are binary options?

A Binary Option is a type of trade option whereby payoff is considered as all or nothing. Because of this concept, using Binary Options when trading, they are easier to understand than when using traditional options. They are also referred as European style options which are cash settled. This means that they can only be exercised upon expiration date. You will find that at expiration time, the Binary options settle in the money, the seller or the buyer of those options gets specific amount of dollars. In similar circumstances, if the options manage to settle out the money, the seller or the buyer of that particular option gains nothing. When this happens, it provides a downside or upside risk assessment.  Actually Binary Options provides full payout as a result of single pip movement unlike traditional options.

Despite the use of the – all or nothing phrases and depending on the actual trading platform used, the term "nothing" can be translated to mean "something". When this is the case and at times of expiration, the option owner may receive certain payout amount. This will be the case even if the option is expired to be considered as ‘out of the money’. In most cases binary options are named using other terms. So you don’t need to worry. For example in forex exchange market, these options are named under the phrases of digital options.

As a Binary Option trader, you should be ready to learn the two outcome options. It is important for you to analyze the expected price movement direction of the various underlying assets. When using Binary Option, unlike traditional options, it is not necessary for you to understand the price movement direction or the magnitude of the price movement. If you are an investor and you have an opinion on certain underlying asset and you really want to place a trade, you can go ahead to trade Binary Options. You should move quickly to make a decision on your position.

You should only buy if you are certain that the market price will rise. The reverse of this concept is also true-selling only if you realize that the market price is more likely to reduce. When you have correct insights more so on expiration date, your contract’s settlement value is your payoff. It is important for you to learn on how the price setting is determined. The price that your Binary option Contract has is almost equal to the probability of some event happening. For example, if you have a $100 contract value and the contract’s last trade value was at $95.00, it shows that the highest percentage of the market believe on the event happening and consequently the contract ending up in dollars.

Binary Options have been most popular in most countries in Europe and you will find them traded in major European exchanges such as EUREX. If you are in the United States, you can trade your Binary Options at any trading board that is based in the USA. 

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