Binary Option

Binary Options – Description & History

Binary options, in finance, refers to an option where the payoff is either a specific amount of a particular asset or nothing at all.  It is called a binary option because of its binary nature where only two outcomes are possible.  Binary option contracts are also known as an all-or-nothing, digital, or fixed return options.  There are basically two types of binary option – the cash-or-nothing option that pays a fixed amount of currency if it expires in the money; and the asset-or-nothing option which pays the value of the underlying assets.

Binary options are attractive because they are structured in such a way that significant payouts are possible even with seemingly insignificant moves in the market, compared to the standard option where significant market movements usually are required before any payout can happen.  The investors get a return in the form of a fixed payout.  This is based on whether the market rises above or falls under a given level at a particular time. The buyer can, therefore, with binary options, look for specific payoffs even with minimal movements in the financial instrument.

7 SUCCESS RULES FOR TRADING BINARY OPTIONS

One of the main benefits of trading binaries is that the traders are not faced with the various issues associated with the traditional stocks and commodities options.  Such binary options contracts are usually short-term options that do not carry significant risk.  Although digital options do not seem to be flexible enough, they are very easy to trade.  The market is comparatively easy to understand and a trader can immediately learn binary option advantages relative to other options markets the moment he decides to deal with instruments making up binary options.

To illustrate, if an investor thinks that the price of a traded forex currency pair will rise in the next hour, he can look for a binary options broker online and choose one from the binary options available, and put some money on it, say $100.  If, for example, he opts for a 70% return on a binary options currency pair which he thinks will gain in the next hour, he will gain $70 in profits on top of his original placement of $100.  However, if the value of the currency pair drops, he will only stand to get 10% of his original investment or less depending on the contract.  These types of binary options are called a ‘call above’ binary.

Another type of options trading in binary options contracts is known as the hit or miss option. Under this option, individuals or options brokers can specify a time and price range for which the market maker will dictate the cost.

History of Binary Options

Binary options first appeared in trading platforms in 2008 when they were introduced to the Chicago Board of Exchange (CBOE).  The same year, they caught on in the North American Derivatives Exchange (NADEX) platforms.  Since then, the face of financial markets was never the same again.  Binary options contracts became easily accessible and were dealt without too much government regulation (though this is expected to change in the future).  Binary options presented a new opportunity for individuals and brokers; and the online platform provided more leeway as they no longer need to physically receive the binary options contract to trade, or wait for the trading floor to open.