A binary option is an option where the trader uses a position of yes or no regarding the price of an asset. It has an all or nothing payoff. They are cash settled options that can only be exercised on the date they expire. Binary options also offer a full payout regardless of the settlement of the asset price. Additionally, “all or nothing” can actually generate something. In other words, with binary options when the option expires, the owner may still receive a payout amount. Many investors want to know “what are binary options”, and hopefully this article will explain just that.
Binary options can also be found under different names. For example, binary options in the foreign exchange market are called digital options.
There are two outcomes possible.
In the majority of platforms for binary options there are two outcomes known as “put” and “call.” The prediction of whether the price of an option will decline is call the put. On the other hand, call is the prediction of when the price of the option will go up. With binary options you only need to be able to predict if the asset price will be lower or higher than the target price, also known as the “strike” price at a specified time.
You must take time to decide what your position will be. You should make an evaluation of the market conditions regarding the asset you have chosen to predict if the pricing will be higher or lower. At the expiration date, if you have predicted correctly, you will receive the value of the settlement in your contract. The broker will establish the return rate for a trade that wins before the trade is made.
The contract price for binary options is determined by the market’s perception of how likely an event will occur. Binary options are typically an easier trade because you only need to have an idea of what direction the option price of an asset will go. With traditional options you must have an idea of the magnitude and direction of the asset price. Additionally, binary options offer a risk to reward ratio that is controlled. This means that the risk and reward are determined ahead of time when the contract is made. There are no risk and reward boundaries with traditional options. As a result, the losses and gains for this type of option can be monumental.