Binary options trading are cash settled options where the payoff is exercised on the expiration date of the trade. This means, that if one on the expiration the options are within the set limit, the trader of the options receives a specified amount that has been pre-decided. But if the options move outside the set limit, the trader of the options receives nothing. This helps in the assessment of the gain or loss before hand. Unlike other traditional options, binary option trading is easier to understand and trade and there is full payout.
In binary options there could be two possible outcomes. Therefore a trader needs to anticipate the price movement and the direction of the asset. Either of the two positions can be taken in trading – buying or selling.
If the trader believes that the price of the asset under consideration would increase or if a particular economic event affecting the price of the asset would occur he may buy. On the other hand if he thinks the opposite he may sell. The result of the insight of the trader would be known on the expiration date, where the payoff is made accordingly as per the contract.
Online Binary option trading is fast becoming a popular financial market instrument that empowers the traders with a flexible approach without the complexities that are involved in the traditional trading options. High payouts can be attained within short trading durations. This is the reason for their growing popularity.
Working of the binary options
As mentioned, the binary options work on the criteria of two possible outcomes in a trade – gain or loss. Therefore the traders have the option of either buy or sell. The factors that decide the potentiality of an outcome are the price of the asset in the future, the expiry time and the direction of the movement of the asset. Also speculation in the financial market with regard to the happening or not happening of a particular condition or scenario, during a specified time also affects the binary options trade. The working of the binary options here is explained through an example.
We take a commodity “A”. Let us assume that its present share price is 430.25 and as a trader you want to speculate the price movement of this share within a time frame of say 2 hours.
As a trader, if you speculate that the price of the share “A” would rise above the current level then you should buy the binary call option. Now if the price of the share “A” goes above the current level at the end of the expiration time, that is, two hours, the option would be treated as “in-the-money” and you would receive the fixed amount of return as decided before hand. However if the price of the share “A” does not rise above the current price level, the trade would be termed as “out-of-the-money” and there would be no payout.
On the other hand if you speculate the price of the share “A” to fall below the current price level you can buy the binary put option. Now at the end of the two hours or at the expiry time, if the price of the share “A” has fallen below the current price levels the trade would be considered “in-the-money” and you would receive the fixed payout as promised. While if the price of the share “A” does not fall as speculated the trade would be considered “out-of-the-money” and there would be no payouts.
As simple as the binary options sound, the binary options are actually simple when used practically and this is the reason why they are becoming more popular than the traditional form of trading.
Online Exotic Options Benefits
There are certain advantages for online binary options trading over other instruments of trading and these are as follows:
1. Simplicity: binary trading is very simple and easy not only to understand but also to trade. Whether an asset would trade above or below is what is to be seen in binary options trading. Also the trader here just needs to consider the price movement of the asset regardless of the magnitude of the movement.
2. Limited risk: the traders are aware of the potential risk involved in a binary option trade. Therefore they can calculate their estimated losses or profits. Unlike other trades where there is no limit to the risk associated, binary options have limited risk.
3. Predetermined payout: for a trade to be successful, even an incremental increase or decrease in the price of the asset is enough. Therefore irrespective of how much is the asset “in the money” at the time of expiration the traders benefit even if there is a small change in the price and they receive the full fixed payout.