BINARY OPTIONS

Binary options are simpler way to trade in options, than traditional options or currencies. Binary options also have, premium, strike price, and an expiry like traditional options. In traditional options, premium amount is determined by the market. But binary options premium amount is selected by the trader.

In expiration case, binary options can have a period from less than a minute to a few days. Traditional options expiration range can be from a week to a couple of years.

A trader will be paid out a certain predetermined percentage of the premium / risk taken if the contract conditions met. The conditions can be varied with different types of binary options.

Binary options are also called as ‘all or nothing’ options.

Binary Options Trading

Assume you are going to trade in binary options of GBP/USD. Current price of the pair is 1.22500 and think it will be above that level after 10 minutes. You see broker payout is 75% on 10 minutes option contract with a strike price target of above 1.22500. You decide to buy a call option with premium amount of $100. After 10 minutes if GBP/USD is above 1.22500 broker provides $175 (100+75) and if GBP/USD is equal to or less than the strike price of 1.22500, trader losses $100. Here the risk is $100. In spot forex if there is no stop loss order placed and position goes against, risk is not limited.

Payout

Factors affecting binary options payout are volatility, time to expiration, underlying asset traded, binary option type, broker’s commission etc. Longer expiration time and low volatility time results in comparatively less payout percentage.

Pre Closure

Some of brokers allow closing binary options position before expiry under certain conditions related to expiry period, lower payout rates than predetermined etc.

The option value moves along with the underlying asset value changes in trading platform with the brokers who provide such pre mature closing facility. The more it goes after the strike price in profitable direction, the more value it carries. The maximum option contract value is less than or equal to pre decided maximum payout.

If the movement is towards loss side covering strike price, out of the money, buyer of option gets much less than the option premium paid if closes before expiry. Broker commission is applicable in both cases.

Before starting to trade, one should analyse the market, understand conditions and payout rates, and can try demo account, to face associated risk.

Types of Binary Options

High / Low Options

Most common and simplest form of binary option is High/Low option and having lowest payout. It is also called as Up/Down, Over/Under and Above/Below.

In UP/Down type of binary option traders purchase CALL option if they think the price will be closed above the strike price on contract expiry. And they buy PUT option if think price will be closed below strike price on expiry.

Time periods available for this type of options are from some seconds to a day and vary with brokers. The High/Low option trading either is a benefit to the account or bad to it. So, proper risk management should be applied.

Touch Options

One Touch Options

In One Touch Options, the market price must touch the strike price at least once with in the expiry time. It may work out in volatile market. In Double Touch Options, there are two strike price levels that to be touched by underlying asset price to win the trade.

No Touch Options

Market price must not touch the strike price during the option contract period. If touches it becomes a loss trade. This type of binary option can be called as No Touch Options. It may work out in consolidating market. In Double No Touch options there are two strike prices that not to be touched by underlying asset price to win.

Touch Options have higher payouts (200 to 400%) than simple Up/Down options type.

Range Options

In Range/Tunnel/Boundary Options, the underlying asset price must not touch two predetermined strike prices and stay in range between them during the option contract period. Range options work out in low volatility market times. Payout is highest and available from 200% to 800%.

Out of Range options where traders can win if the underlying asset price breaks the predetermined range with in the expiry, are also provided by some brokers.

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