A binary option is a derivative option where a trader makes a bet on the price movement of an underlying asset in near future for a fixed amount. The underlying assets may be
- Index – Dow Jones, Nikkei, Nasdaq ·
- Stocks -Binary options of all popular stocks like Cisco, Google are available for trade.
- Forex – Combinations of all major currencies such as USD, EUR, GBP, JPY and AUD just to name a few ·
The dictionary meaning of ‘binary’ suggests some thing that can assume two values, in simple terms it can be expressed as true/false, yes/no or 0, 1 i.e. there are two outcomes. Similarly in binary option a trader has to bet on any one out of two options. i.e. the price of the underlying asset will be below or above the current price at expiry time or date.
Trader can select to BUY or SELL an underlying asset , if he is expecting the price will rise or fall in the near future, for which a trader will earn fixed amount if bet worked in his favor.
In binary option, if a bet works in trader’s favor, it is called ‘in the money’ i.e. price of an underlying asset on any given future date/time closes more than the ‘strike price’ of an option of that particular underlying asset on that particular date for a CALL option.
If the bet works against the trader’s prediction ,i.e. ‘strike price’ is more than the price of underlying asset at expiry date/time (date of consideration) then trader gets nothing out of that trade.
A binary option automatically expires on the expiry date or time and it can’t be carried over to next expiry date/time, and the option holder can’t buy or sell the actual security. Binary option trader just bets on the price movement , whether certain security price will rise or fall at future date / time, accordingly he/she buys/sells certain kind of option either call/put. If trader sees bullish trend then he/she buys call option, if bearish then he/she buys binary put option.
Binary options contracts are offered with different short duration time periods, so traders have broad range to choose, starting from 30 seconds to months depending on their requirement.
- Binary options are not traded on regulated exchanges.
- Binary option trades are confined to the Broker’s server , your trade never reach any exchange house.
- No actual buying/selling of stocks or commodities or any underlying asset take place in Binary option trading.
- The binary options expiry time can not be extended, neither you can buy or sell the actual underlying asset.
- Hence binary option is purely a bet , where you can use technical analysis , fundamental analysis, indicators and economic news to help you win the bet (trade).
We strongly recommend traders to know the above facts ,before they step into BINARY OPTION TRADING.