What Are Binary Options: A Practical Overview
Binary option trading is investing on whether something will or will not happen to the value of an asset within a predefined time frame or at a predefined time. You risk a financial loss if your opinion turns out to be incorrect and you make a financial gain if your opinion is correct. If your option is successful you will get your investment back and win a predetermined payout % of your stake. If your option is incorrect you will lose your investment.
The main differences of binary options compared to other options and investments is that they are more short term and while other options have the possibility of winning or losing any amount within a wide range binary options have only 2 possible results, you will either win the maximum possible profit or lose the maximum possible loss.
Basic Example
At 10:50 the Euro currency is worth 1.33571 US Dollars. You invest ฿0.1 that it will be higher than that at 11:00 with a 81% payout.
Scenario 1: At 11:00 the EUR/USD has gone up to 1.33572 (or anything higher) you receive ฿0.181 made of your ฿0.1 investment and ฿0.081 profit!
Scenario 2: At 11:00 the EUR/USD has gone down to 1.33570 (or anything lower) you receive ฿0 and have lost ฿0.1.
Scenario 2: At 11:00 the EUR/USD has gone down to 1.33570 (or anything lower) you receive ฿0 and have lost ฿0.1.
Basic Terms
In the above example the EUR/USD was the “underlying asset”.
1.33571 was the “entry price/target price”.
You made a “call” option wagering that the price would rise, if you wagered the price would fall that would be a “put” option.
In scenario 1 1.33572 was the “exit price/expiry price”.
In scenario 1 you finished “in the money”.
In scenario 2 you finished “out of the money”.
For more terms please see your Glossary of Binary Option Terms
There are 3 main varieties of binary options offered by brokers. In order of popularity.
High/Low
High/Low binary options let you invest on whether the value of an asset will be up from its current price (a call option) or down from its current price (a put option) at the time it expires. The most popular time frames in which to trade high/low options are 60 seconds, 5, 10 or 15 minutes, 1 hour and 1 day. The longest you are likely to see is 1 month but they could work with any time frame.
The payout % the investor receives if they correctly predict which direction the price moves ranges from 70%-85%. You will see lower payout rates but these are probably poor value markets to be avoided unless you have a trading strategy with a very high win rate. To better understand this see our article Break Even Point and Required Win Rate. You will see higher payout rates advertised but these are usually reserved for VIP customers which you can become by making a large deposit.
One Touch
One touch binary options allow you to invest on whether the value of an asset will touch a certain price point at any time before the option expires. The common time frames are longer than those for high/low options with 1 hour, by the close of trading, 1 day and over the weekend the most common.
One touch options are usually offered on improbably high or low target prices (relative to the price at the time you take the option) so they can give a high payout %, typically from 160% – 500%.
Boundary
Boundary binary options ask if you think the value of an asset will remain within a certain price range or be outside that price range at the time the option it expires. Outside means above a sertain amount or below a certain amount so you are not predicting the direction you are predicting the volatility or lack of volatility.
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