Binary Options, sometimes called digital or fixed return options, are a simplified yet exciting method of trading the financial markets, based on a determination of whether the price of an asset—such as a share price or commodity like gold—will close ABOVE or BELOW the current price within a set time period within the next one hour. If your prediction is correct you win the trade and earn the payout established for that particular asset and time period—generally 70%-85% of the value of the trade.

There are a few basic considerations to binary options trading: the asset to trade, the direction of the price at the option expiration time in relativity to the current price, and the trading value. If we believe the price of the asset will close ABOVE current price at expiry, we want to buy a CALL option . If we believe the price of the asset will close BELOW the current price at expiry, we want to buy a PUT option . As traders, we determine the value which we want to place on any given trade, whether it is $50, $500, $1000 or any other value up to $2000 depending on our confidence level and risk tolerance.

If our speculation is correct, we are “in-the-money”. If the market moves in the opposite direction from our prediction, we are “out-of-the-money”. If the asset price on our option closes at the exact same levels, we are “at-the-money” and receive our original trading value back with neither profit nor loss.

Example:

Being “In the Money”

You would be considered “in the money” in the two following cases:

Binaries, can have only one of two possible outcomes. When trading binary options we only have to ask ourselves two questions. First, what is the current rate of currency we are analyzing? Second, can we expect the rate to be higher or lower in a fixed time from now? For example, imagine you are a trader who is willing to risk $100 on the idea that Euro/Dollar’s exchange rate will increase in one hour from now. If your prediction is correct and the fixed return rate is 70% you will receive $170. If incorrect and your option decreases below the strike price, you will lose your initial investment and receive nothing. The term ‘binary’ thus suited this all-or-nothing type of trading. You should now be starting to realize  why binary options are fast becoming the simplest way to trade the markets and are yielding large profits for online traders.

Binary options; also known as digital options, are a cross between traditional buy-and-sell options and those of fixed returns. One of the major differences between trading the stock market and trading binaries is that with binary options, you don’t actually own the share, you just bet on the performance of the share price. Unlike a spread bet a binary option does not require a margin, there are no stops and the trader knows the exact maximum risk and maximum profit.

Binaries came about as traders and investors worldwide strove for new, simplified ways to trade options across the financial markets. Binary options are a cross between traditional buy-and-sell options and those of fixed returns. However, do not be overwhelmed by this new system; more and more financial traders are finding it the most simple, ‘straight up’ and enjoyable way to get the best out of online trading.

Learn the basics of Binary Options with these Free E-Books:

1. Controlled Risk – The percentage reward is known from the outset, as is what the player stands to lose i.e the exact amount they placed.

2. Easier, simpler – The player only needs a sense of direction i.e. ‘Will the exchange rate increase/decrease in half an hour?’

3. “In the money” – For a profitable trade to take place there is a need for price to close in-the-money, a winning trade will receive the entire payoff, even if was ‘right’ by a single tick.

4. Protection – A safer option to take if a trader has an open position elsewhere in currency, stocks etc. Utilizing a binary option can eliminate a further loss elsewhere.

5. Punctuality – Binary contracts are being issued around the clock, allowing traders to trade on multiple time frames. There is always an expiration time arriving, which constantly yields new opportunities for binary traders.

Digital Option Calculation

Binary options provides a fixed payout of M when the price of the underlying instrument S ends up above (in the case of a “call”) or below (in the case of a “put”) the strike price K.

This can be visualized as follows, with the height of the horizontal bar equivalent to the payoff M: