Binary Options
Binary Options - Definition
Exotic Options which pays a fixed return when it finishes in the money upon expiration.
Binary Options - Introduction
Binary options, also known as Digital Options, All or Nothing Options or Fixed Return Options, are definitely one of the most popular type of exotic options ever. They are extremely popular in forex options trading and has since 2008 been approved for listing in the US market on several stocks, indexes and ETFs.
Unlike regular plain vanilla options, Binary options pay a fixed return as long as the options finish in the money by expiration no matter how much in the money. It is like placing a bet for a specific amount of money on the underlying asset finishing higher or lower than a specific price.
This tutorial explores what Binary Options are, how they are traded, how they are priced and how they work.
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What Exactly are Binary Options?
The reason why Binary Options are "Binary" is because trading binary options leads to only two possible outcomes; Winning a specific fixed amount of money or losing it all. Like plain vanilla options. Binary options comes with call options and put options as well. When you buy Binary Call Options, you win a specific amount of money when the underlying asset ends up higher than the strike price (in the money ) upon expiration and when you buy Binary Put options, you win a specific amount of money when the underlying asset end up lower than the strike price upon expiration. You lose it all (or a fixed amount) if the stock does not.
In essence, buying Binary Options is placing a bet on whether the underlying asset would be higher or lower than its strike price by expiration. This is also why Binary options are usually offered at the money with a 50/50 chance of ending up either way.
Binary Call Options
Binary Call Options are Binary Options betting on the price of the underlying asset rising above the strike price. Like normal call options, they are bought when you are bullish on the underlying asset. Buying Binary Call Options pays you a fixed return when the underlying asset ends up higher than the strike price upon expiration. Returns are usually expressed as a percentage of the original investment. If the underlying asset finishes lower than the strike price, you lose your entire investment in the position or a certain percentage of it.
Binary Call Options example
Assuming you bought $1000 worth of Binary call options on AAPL with strike price of $200, payout of 70% and risk of 100%.