Binary option explained, Is it trading or betting?
A binary option is a derivative option where a trader makes a bet on the price movement of an underlying asset in the near future for a fixed amount. The underlying assets maybe
- 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 to name a few ·
The dictionary meaning of ‘binary’ suggests something 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 options, a trader has to bet on anyone 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.
The trader could 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 a 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 specific date for a CALL option.
If the bet works against the trader’s prediction,i.e., ‘strike price’ is more than the price of the underlying asset at expiry date/time (date of consideration), then the 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 the next expiry date/time. The option holder can’t buy or sell the actual security. Binary options trader bets on the price movement, whether specific security prices will rise or fall at scheduled date/time, accordingly he/she buys/sells certain kinds of options either call/put. If the trader sees a 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 periods, so traders have a broad range to choose from, starting from 30 seconds to months depending on their requirements.
- Binary options are not traded on regulated exchanges.
- Binary options trades are confined to the Broker’s server; your trade never reaches any exchange house.
- No actual buying/selling of stocks or commodities or any underlying asset takes place in Binary options 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 lottery (trade).
We strongly recommend traders to know the above facts, before they step into BINARY OPTION TRADING.