Binary options offer an effective alternative to traditional trading strategies, providing investors across a wide range of skill levels with the opportunity for significant financial returns. This binary options trading guide will help users understand the five essential terms behind binary options trading, helping you to achieve your goals.
Key to any binary options trading guide is defining some of the most important terms. In the binary options trading world, this revolves around binary options, binary call option, binary put option, option in the money and option out of the money.
Binary Options
For this binary options trading guide, it is most important to start with the basics. That begins with understanding what a binary option actually is. Binary options, also commonly known as digital options, are investments based on short-term projections. They offer investors with an exciting alternative to traditional trading and are suitable for investors of all skill levels.
Binary options are contracts that require the investor to select between two outcomes, if an asset will rise (through a CALL option) or fall (through a PUT option). They also have two possible outcomes, that the view taken by the investor is correct or incorrect. When the underlying stock meets or exceeds its predetermined threshold or strike price, a fixed amount will be paid.
Upon expiration, binary options pay out a fixed percentage of the value invested if the investors’ prediction is correct (or “in the money”). This payout is based on the movement not on the magnitude of increase or decrease of the underlying asset.
Binary Call Option
A binary call option is one of the binary options that gain value when the underlying security is trading at more than the strike price upon expiration. Investors using a binary option platform will identify that the underlying asset is likely to rise in price. If the price of the underlying security goes up and exceeds the strike price of the binary options at expiration, the predetermined amount will be paid out.
Binary Put Option
A binary put option is the opposite of a binary call option. This binary option will gain value when the underlying security is trading at less than the strike price at expiration. Similar to the call option, an investor using a binary option platform will identify that the asset will likely fall in price. If the price of the underlying security trades less than the option strike price at expiration, the predetermined amount will be paid.
Option in the Money
After selecting if an asset will rise (through a CALL option) or fall (through a PUT option) in price, investors need to wait for the expiry time. Once this occurs, an option is in the money if the view of the investor is correct. When an option is in the money the pre-determined amount will be paid out to the investor.
Option out of the Money
An option is out of the money when the view of the investor is incorrect upon expiration. When this occurs, no payout is received by the investor from the binary options platform.
Having a clear understanding of terms is the most important element of any binary options trading guide. Hopefully the information above has helped you gain clarity on these terms so you can begin exploring the world of binary options trading.