Binary option trading is trading where the payouts are fixed or if the options close out of money there is no payout. This is also known as all or nothing options or digital options. There are two major categories of binary options, cash or nothing and asset or nothing binary options.
Another name for binary options is Fixed Return Options (FROs, s called because the amount to be paid out is fixed and set at time of trading. The trader just needs to decide if the asset will increase or decrease in price. Trading in binary options is thought of as a very plain form of trading. Traders know what the profit or loss will be on a trade as the payout is fixed. Due to this there is a limited amount of risk and the potential to earn money is huge, making binary option trading very popular. There are two variations in every method of binary option trading, the call option and the put option. Traders use the call option to purchase an asset at a set price and the put option allows the trader to sell an asset at an agreed amount.
Classification of Binary Options
There are a number of different types of binary options but the ones most used are the cash or nothing and the asset or nothing binary options.
Cash or nothing – This is the option where the amount of payout is predetermined and if the trade fails, the trader gets no cash.
Asset or nothing – Is the type of option that pays out the value of the initial security in a thriving trade, otherwise the trader gets nothing.
The basis of the style of trade is another classification of binary options. They can either be American style or European style, but the most common is the European style.
American Style – this style of option automatically exercises the option when the price of the security reaches the predetermined price giving a completely result.
European Style – in this type of option the options are exercised when the time has expired and only if the security price has reached the hit price after expiry. If the hit price is reached prior to the expiry date, the trader looses the right to the payout.
The major features of binary options trading are that the payout can be the same as the price of the hit, but can also be more or less. Some money lending businesses may want to evade a certain level of high interest so they get a binary option with the hits at the level they want to evade. So the business will receive a fixed payment if the interest rate goes above an agreed level.
It is very important to understand binary option prices before investing in them. Generally, the binary options trading prices indicate the chances of a contract ending with the trader being in profit or loss. Clever traders will see that a contract is about to expire outside their favour and will quickly respond to this.