What is Binary Options
DEFINITION: A binary option is a type of derivative option where a trader makes a bet on the price movement of an underlying asset in near future for a fixed amount. Dictionary meaning of ‘binary’ suggests where a moment involves two or composed of two, 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 ‘buy/sell’ basis two definite outcomes whether an underlying asset 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 for a trader a bet works if an option expires ‘in the money’ i.e. price of an underlying asset on any given future date closes more than the ‘strike price’ of an option of that particular underlying asset on that particular date. If an option is ‘out of money’ i.e. ‘strike price’ is more than the price of underlying asset on expiry date (date of consideration) then trader gets nothing out of that trade.
Binary options are also called as digital options, all or nothing options, one touch options, fixed return options and bet options.
DESCRIPTION: Binary options underlying base is compulsorily cash only settlement on the date of expiry of an option. This works on the same lines like European style option. These options have a fixed payout for a trader, which has a maximum time limit considering the difference between the purchase date and exercise date of an option. An option automatically exercises or expires on the said date and it can’t be carried out on next expiry date, and the option holder can’t buy or sell the actual security. Binary option holder just bets on a proposition whether certain security price will rise or fall in future date basis that he/she buys/sells certain kind of option either call/put. If trader sees bullish trend then binary call option if bearish then binary put option.
These are important elements to any binary option:
1) Cash settled
2) Put/call option3) Expiry Date4) Underlying Asset and its price5) Settlement Price
Binary options are normally found in two formats,
Either cash or nothing binary options where trade is done on fixed amount i.e. if an option expires ‘in the money’ then option holder will get fixed cash amount on which particular trade was entered on, if ‘out of the money’ then zero cash.
Or asset or nothing binary options where trade is done asset value i.e. if an option expires ‘in the money’ then option holder will get amount equivalent to the market value of an underlying on which particular trade was entered on, if ‘out of the money’ then zero value.
Examples:
A trader thinks the Reliance Industries stock will touch Rs 950 in a month’s time. Through a broker, who deals in binary option, he buys a ‘cash or nothing’ binary call option of RIL with fixed a binary payoff of Rs 500. Now, he buys one lot of one month call option at strike price of Rs 950, which is expiring on Nov 27. Now on the expiry date i.e. Nov 27, RIL shares close at Rs 955, which means the option expired ‘in the money’. So the trader will receive Rs 500. Had the stock closed below Rs 950, the option holder would have received no money.
Worldwide binary options for below-mentioned securities are found:· 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· Interest rates – Generally, fixed return options found in the US where hourly, daily, monthly contracts are available· Commodities – Gold, silver, crude oil
A binary option is different from any classic options, be it call or put option, why?
Some of the advantages of binary options are:
Trading is hassle-free as the trader has to track underlying security trend only and speculate on sameNo actual buying/selling of stocks or commodities or any underlying assetBinary options have fixed payouts, so it’s a informed decision where reward and risk is definedBinary options can be used for intraday speculative trading and hedging of physical trades for short term.Binary options contracts are offered with different short duration time periods, so traders have broad range to choose from seconds to months depending on their requirement
In some countries, binary options are traded on regulated exchanges, but generally they are termed risky around the world because they are unregulated and are traded through fraudulent ways through the medium of brokers over the internet. All major exchanges alert investors against such systems. In India Sebi doesn’t allow binary options on regulated derivative exchanges and they are illegal. Major European exchanges offer binary options in various securities, such as EUREX, and they are quite popular. CBOT (Chicago Board of Trade) allows selective binary options trading on Fed Funds Rate to members only. NADEX (North American Derivatives Exchange aka Hedge Street) formally allows US-regulated binary options on major securities like forex pairs (EUR/USD, GBP/USD), commodities like gold & crude oil and it requires special bank accounts under the jurisdiction of CFTC regulations.
Source: Binaryoptions.net.au
Know More: Chromosphere Definition, Third Party Insurance Definition, Bank Rate Definition, Infomercial Definition, Cash Accounting Definition, Inferior Goods Definition, Gagan Definition, Category Specialists Definition, Balanced Scorecard Definition, Progressive Tax Definition
In binary option for a trader a bet works if an option expires ‘in the money’ i.e. price of an underlying asset on any given future date closes more than the ‘strike price’ of an option of that particular underlying asset on that particular date. If an option is ‘out of money’ i.e. ‘strike price’ is more than the price of underlying asset on expiry date (date of consideration) then trader gets nothing out of that trade.
Binary options are also called as digital options, all or nothing options, one touch options, fixed return options and bet options.
DESCRIPTION: Binary options underlying base is compulsorily cash only settlement on the date of expiry of an option. This works on the same lines like European style option. These options have a fixed payout for a trader, which has a maximum time limit considering the difference between the purchase date and exercise date of an option. An option automatically exercises or expires on the said date and it can’t be carried out on next expiry date, and the option holder can’t buy or sell the actual security. Binary option holder just bets on a proposition whether certain security price will rise or fall in future date basis that he/she buys/sells certain kind of option either call/put. If trader sees bullish trend then binary call option if bearish then binary put option.
These are important elements to any binary option:
1) Cash settled
2) Put/call option3) Expiry Date4) Underlying Asset and its price5) Settlement Price
Binary options are normally found in two formats,
Either cash or nothing binary options where trade is done on fixed amount i.e. if an option expires ‘in the money’ then option holder will get fixed cash amount on which particular trade was entered on, if ‘out of the money’ then zero cash.
Or asset or nothing binary options where trade is done asset value i.e. if an option expires ‘in the money’ then option holder will get amount equivalent to the market value of an underlying on which particular trade was entered on, if ‘out of the money’ then zero value.
Examples:
A trader thinks the Reliance Industries stock will touch Rs 950 in a month’s time. Through a broker, who deals in binary option, he buys a ‘cash or nothing’ binary call option of RIL with fixed a binary payoff of Rs 500. Now, he buys one lot of one month call option at strike price of Rs 950, which is expiring on Nov 27. Now on the expiry date i.e. Nov 27, RIL shares close at Rs 955, which means the option expired ‘in the money’. So the trader will receive Rs 500. Had the stock closed below Rs 950, the option holder would have received no money.
Worldwide binary options for below-mentioned securities are found:· 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· Interest rates – Generally, fixed return options found in the US where hourly, daily, monthly contracts are available· Commodities – Gold, silver, crude oil
A binary option is different from any classic options, be it call or put option, why?
Some of the advantages of binary options are:
Trading is hassle-free as the trader has to track underlying security trend only and speculate on sameNo actual buying/selling of stocks or commodities or any underlying assetBinary options have fixed payouts, so it’s a informed decision where reward and risk is definedBinary options can be used for intraday speculative trading and hedging of physical trades for short term.Binary options contracts are offered with different short duration time periods, so traders have broad range to choose from seconds to months depending on their requirement
In some countries, binary options are traded on regulated exchanges, but generally they are termed risky around the world because they are unregulated and are traded through fraudulent ways through the medium of brokers over the internet. All major exchanges alert investors against such systems. In India Sebi doesn’t allow binary options on regulated derivative exchanges and they are illegal. Major European exchanges offer binary options in various securities, such as EUREX, and they are quite popular. CBOT (Chicago Board of Trade) allows selective binary options trading on Fed Funds Rate to members only. NADEX (North American Derivatives Exchange aka Hedge Street) formally allows US-regulated binary options on major securities like forex pairs (EUR/USD, GBP/USD), commodities like gold & crude oil and it requires special bank accounts under the jurisdiction of CFTC regulations.
Source: Binaryoptions.net.au
Know More: Chromosphere Definition, Third Party Insurance Definition, Bank Rate Definition, Infomercial Definition, Cash Accounting Definition, Inferior Goods Definition, Gagan Definition, Category Specialists Definition, Balanced Scorecard Definition, Progressive Tax Definition