Binary Options
From Binary Options Trading Wiki
Contents |
Introduction
A binary option is an option that pay a fixed amount or nothing, whether a certain condition is fulfilled when the option expired. These type of options, are also referred to as all-or-nothing options, since it is a type of option where the payoff is all or nothing. The return is therefore fixed and it comes to no surprise that such options are also known as:
FRO's-Fixed Return Options, Digital Options is another common term. More simply put all a trader needs to speculate about the direction of an instrument and decide whether the underlying asset price is going up or going down without taking other factors under consideration.
Binaries considered to be one of the simplest trading product out there, As the constructed investment product the trader know at the time of the trader what is the maximum profit and loss.
One Hour Options
One Hour Options are considered as a mass market financial instrument as it empowering traders with a very flexible trading approach without the complexities involved trading traditional vanilla options.
Whether you are looking for a short term speculation or hedging you portfolio binaries can help you get high payout within short trading durations as so, binaries are gaining popularity among traders globally.
Hourly Options are available on a variety of underlying assets: Stocks, Commodities, Currencies and Indices.
Whether the trader has made a call or put, if at contract expiration the trader has been successful with regards to the anticipated direction of the underling asset price then the contract will expire in the money. On the contrary if the trader has been unsuccessful with the anticipated direction then the contract will expire out of the money
Binary Options trading considered as one of fastest growing segment of the simplified trading products.
They behave like fixed-odds-return investment products that have two possible absolute outcomes with structured reward and risk, hence the word 'binary'.
On the occasion when the expiry level is equal to the strike price the contract will expire at the money. Normally there will be a fixed cash settlement to returned which is often the initial investment, however this is dependent on what was predetermined and agreed in the contract.
- How it works?
This special option reflects specific speculation in financial markets that might happen during a specific time period (one hour options).For example: Google price is now share price is now: 430.25 and you want to speculate about the price movement of the share with a time frame of 1 hour. If you think that Google will rise above this price level, than you should buy binary call option- if Google price will be above the current price level during expiration than the option expired in the money, paying you the fixed odds return promised during the trade, If not than the option expired out of the money.
If you think that Google will fall below this price level, than you should buy a binary put option- if Google price will be below the current price level during expiration than the option expired in the money, paying you the fixed odds return promised during the trade,f not than the option expired out of the money.
The main difference
Digital options are similar to ordinary options in the sense that the payoff is based on the price of the underlying asset when the contract expires, however with a binary option only need to take a view on the anticipated direction of the underlying asset price and don't have to take magnitude into consideration. The main difference between a regular vanilla option and a digital option is the extent to how much a contract can potentially lose or gain. Digital options often referred to as FRO fixed rate options since the contract will have predetermined percentage of fixed rate of return, unlike traditional vanilla options which are much riskier since the potential gains are infinite of course risk can be managed by strategical stop loss orders.
Comparison
| | Vanilla Options | Binary Options |
|---|---|---|
| Expiration | Once a month | One Hour Options. |
| Payout | Dynamic, based of the underlying asset price | Fixed (65% -70%) |
| In-The-Money | Requires a relation of the strike price of an option and the underlying price | Price movement isn't relevant, just above or below |
| Execution | Options can be exercised any time prior to expiry | Can't be exercised before expiry |
| Measurement | Mimic underlying assets that are traded in secondary markets | By money alone |
| Right to buy | The option buyer has the right to exercise his options | Don't have the right to exercise to stocks |
Intuitive trading platform
Simplicity-Whether the instrument will close above or below?
- The user interface is simple to understand and straight forward to trade.
- The trader only needs to consider the direction of the asset price.
Limited risk and predetermined payout
- The payoff is fixed and pre-determined so therefore the potential risk and reward is known from the outset. Whereas with traditional options there are no outlined parameters so the possible loss or gain is not known.
- The option will settle the contract irrespective of how much the asset price is 'in the money' at expiration. Therefore even if the contract is only successful by one tick the contract still pays out at the fixed level.
Hedging-Simplified hedging your portfolio
- These options are often used as an effective tool to hedge existing positions. As a product they are compatible to most commonly used trading methods and strategies. Also its possible to offer a a greater selection of short-term contracts across all markets, which enables the intra-day trader to trade more frequently.
In the money
- As opposed to vanilla options, While trading the options can close 'in the money' collecting the full payoff even with a minimal price change of a single tick.
Ex-changeability
- Binaries are issued 24/7, allowing traders to trade on multiple time frames. As binaries are on a variety of global underlying assets from different exchanges traders are now able to trade binaries 24/7 under the same platform.
Trading Strategies
A very common betting strategy is to make a pull or call option once there has been a big move in the market especially if it is an unexpected move. More often than not possible to pick up cheaper options in other words buy/sell cheaper binary, this is based on the premise that the market will swing back. Since you should have picked up a cheap position then even if the trade is unsuccessful and the market doesn't reverse the losses are minimal. This is known as reverse strategy.
Often when binary betting people will put positions of [on the back off economic indicator being announced that historically have a big influence on market prices. For example quarterly profit or loss announcements from firms are eagerly watched by potential traders and betters, since positive or negative results often reflect the movement of the share prices. As well as formal preplanned announcements traders will always be watching the news, as many different events can influence the markets i.e. Natural disasters to political changes.
Whilst binary option products are very attractive to the speculative trader and casual better, ultimately the best strategies come with experience which cant be taught.
The Terms in the financial space
Binary options falls under the umbrella of exotic options but within financial market they are often referred to as digital options. Exotic options is a derivative and the value is derived from the underlying asset, however unlike plain vanilla derivatives exotic options have added features often making it more complex.
Whilst digital options are very simple to understand and easily traded the calculations behind the pricing is sophisticated, its for this reason digital options are known as an exotic option.
Digital options are usually traded OTC (over the counter) across all assets in financial markets but more commonly used within the Forex and Interest markets. More recently numerous stock exchanges have produced listed digital options on selected stocks, commonly known as FRO fixed return options. Today the CBOE offers fixed return options on S&P500 and VIX, also 20 stocks were listed on the AMEX in 2008.
Sites to review
TradeSmarter.com- Binary options trading platform based on virtual money only
MarketPunter.com.au- Regulated Australian Broker providing binary Options trading
StartOptions.com- Newly launched digital options brokerage