How to Understand Binary Options
Learn about options trading., Learn about binary options., Learn how a contract price is determined., Learn the terms "in-the-money" and "out-of-the-money.", Understand one-touch binary options.
Step-by-Step Guide
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Step 1: Learn about options trading.
An "option" in the stock market refers to a contract that gives you the right, but not the obligation, to buy or sell a security at a specific price on or before a certain date in the future.
If you believe the market is rising, you could purchase a "call," which gives you the right to purchase the security at a specific price through a future date.
Doing so means you think the stock will increase in price.
If you believe the market is falling, you could purchase a "put," giving you the right to sell the security at a specific price until a future date.
This means you are betting that the price will be lower in the future than what it is trading for now., Also called fixed-return options, these have an expiration date and time as well as a predetermined potential return.
Binary options can be exercised only on the expiration date.
If at expiration the option settles above a certain price, the buyer or seller of the option receives a pre-specified amount of money.
Similarly, if the option settles below a certain price, the buyer or seller receives nothing.
This requires a known upside (gain) or downside (loss) risk assessment.
Unlike traditional options, a binary option provides a full payout no matter how far the asset price settles above or below the "strike" (or target) price.
For instance, if you might bet that the share price of X Company will be above $15 on July 10th at 3pm, and you buy one binary call option for $50 with a predetermined payout of $100.
If, at 3pm on July 10th, the share price of X Company is $16, then you will be paid $100 for a $50 profit.
If the share price was $14, then you would lose your $50.Some binary options will pay out if the share price is met during the determined period.
So, if the share price was at $16 at 1pm on July 10th but then dropped to $14 at 3pm, you could still get the $100. , The offer price of a binary options contract is roughly equal to the market's perception of the probability of the event happening.
The price of a binary option is presented as a bid/offer price that shows the bid (sell) price first and offer (buy) price second, for example, 3/96, which represents a bid price of $3 and an offer price of $96.
For example, if a binary option contract with a settlement price (payout) of $100 has a quoted offer price of $96, this means that the majority of the market thinks that the underlying commodity with fulfill the terms of the option and achieve the full $100 payout, whether that means going above or sinking below a certain market price.
This is why the option, in this case, is so expensive; the perceived risk is much lower., For a call option, in-the money happens when the option's strike price is below the market price of the stock or other asset.
If it's a put option, in-the-money happens when the strike price is above the market price of the stock or other asset.
Out-of-the-money would be the opposite when the strike price is above the market price for calls, and below the market price for a put option. , These are a type of option growing increasingly popular among traders in the commodity and foreign exchange markets.
This type of option is useful for traders who believe that the price of an underlying stock will exceed a certain level in the future but who are unsure about the sustainability of the higher price.
They are also available for purchase on weekends when markets are closed and may offer higher payouts than other binary options. -
Step 2: Learn about binary options.
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Step 3: Learn how a contract price is determined.
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Step 4: Learn the terms "in-the-money" and "out-of-the-money."
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Step 5: Understand one-touch binary options.
Detailed Guide
An "option" in the stock market refers to a contract that gives you the right, but not the obligation, to buy or sell a security at a specific price on or before a certain date in the future.
If you believe the market is rising, you could purchase a "call," which gives you the right to purchase the security at a specific price through a future date.
Doing so means you think the stock will increase in price.
If you believe the market is falling, you could purchase a "put," giving you the right to sell the security at a specific price until a future date.
This means you are betting that the price will be lower in the future than what it is trading for now., Also called fixed-return options, these have an expiration date and time as well as a predetermined potential return.
Binary options can be exercised only on the expiration date.
If at expiration the option settles above a certain price, the buyer or seller of the option receives a pre-specified amount of money.
Similarly, if the option settles below a certain price, the buyer or seller receives nothing.
This requires a known upside (gain) or downside (loss) risk assessment.
Unlike traditional options, a binary option provides a full payout no matter how far the asset price settles above or below the "strike" (or target) price.
For instance, if you might bet that the share price of X Company will be above $15 on July 10th at 3pm, and you buy one binary call option for $50 with a predetermined payout of $100.
If, at 3pm on July 10th, the share price of X Company is $16, then you will be paid $100 for a $50 profit.
If the share price was $14, then you would lose your $50.Some binary options will pay out if the share price is met during the determined period.
So, if the share price was at $16 at 1pm on July 10th but then dropped to $14 at 3pm, you could still get the $100. , The offer price of a binary options contract is roughly equal to the market's perception of the probability of the event happening.
The price of a binary option is presented as a bid/offer price that shows the bid (sell) price first and offer (buy) price second, for example, 3/96, which represents a bid price of $3 and an offer price of $96.
For example, if a binary option contract with a settlement price (payout) of $100 has a quoted offer price of $96, this means that the majority of the market thinks that the underlying commodity with fulfill the terms of the option and achieve the full $100 payout, whether that means going above or sinking below a certain market price.
This is why the option, in this case, is so expensive; the perceived risk is much lower., For a call option, in-the money happens when the option's strike price is below the market price of the stock or other asset.
If it's a put option, in-the-money happens when the strike price is above the market price of the stock or other asset.
Out-of-the-money would be the opposite when the strike price is above the market price for calls, and below the market price for a put option. , These are a type of option growing increasingly popular among traders in the commodity and foreign exchange markets.
This type of option is useful for traders who believe that the price of an underlying stock will exceed a certain level in the future but who are unsure about the sustainability of the higher price.
They are also available for purchase on weekends when markets are closed and may offer higher payouts than other binary options.
About the Author
Andrea Coleman
Brings years of experience writing about hobbies and related subjects.
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