A Binary option as the name suggests has only two possible outcomes – All or Nothing. Hence, a binary option is also known as “All or Nothing” Option. When one successfully trades an “All or Nothing Option”, one is rewarded either by way of a fixed amount of cash or a unit asset of the underlying instrument.
Binary option are typically classified into “Cash or Nothing” binary option and “Asset or Nothing” binary option. The classification of Binary Options is based on the nature of the reward given on a successful binary option trade. When the reward of a successful binary option trade is in fixed amount of cash, it is referred to as “Cash or Nothing” binary option. On the other hand, if the reward is in terms of the value that the underlying share has, it is referred to as “Asset or Nothing” Binary option.
Binary options are also classified as European Style or American Style. In a European style binary option, the price of the underlying security is compared to the strike price only at the end of the expiration period. Also, one does not get rewarded in case the strike price is achieved prior to the expiration date in a European style binary option. On the other hand, an American style binary option gets exercised the moment the price of the underlying security just brushes the strike price.
Irrespective of their types, Binary options are simple to trade and easy to understand. And this is what makes them a favorite with the trading community.
The benefits of trading via the binary option route are manifold. Let us first focus on these advantages.
The first and the most important advantage is that Binary Options are simple to understand and trade in. This is primarily because of the fact that the trader needs to understand and predict the general direction, either up or down, that the instrument will move in. If this prediction is accurate and precise, the trader can earn a lot of money, sometimes just by a single click.
Also, anyone having even a limited knowledge of financial instruments can easily trade in the Binary Options. The following example proves this point even further. Let’s say you are a steel merchant having a fairly good knowledge of the way steel prices move. This knowledge is sufficient for making you a good Binary Options trader in the steel commodity even though your knowledge is restricted just to that single commodity.
A Binary Options Trader is always protected against unlimited amount of losses, which are restricted to the contract value of the commodity being traded in.
Not only this, the Binary Options trade is available for a variety of maturity periods, providing you with a wide time frame to select your trading period. All you need to do is just select the time period across which you are comfortable and confident of your prediction and start trading.
Binary Options trade has a few limitations as well, which will be covered separately. More importantly however, its advantages and benefits far outweigh the limitations.
Unlike the other options available for trading, the Binary Options in finance imply a payoff method, where you either get a fixed amount of an asset or nothing at all. Just as in computer jargon, the binary number 0 and 1 imply signify True value or False value, also interpreted as a win/loss situation, similarly the Binary options only provide you with simply two options making you win or lose a prefixed amount when you trade in them.
So what is this Binary Option Trade all about? Well, in Binary Option trade it is not only important to estimate the quantum of increase or decrease that the underlying instrument is likely to witness, but it is equally important to correctly predict the general direction, whether up or down that the instrument is likely to move in. Therefore, you can enter a call option if you predict a rise in the price of the underlying instrument. Conversely, you can enter a put option if you predict a fall in the price of the underlying instrument.
Also, each Binary option has a contract price and an expiration date attached to it. In this trade, the price of the underlying instrument on the expiration date is compared to underlying contract price to help determine if the price is higher or lower than the contract price.
It is also important to remember that not all instruments are available for binary option trading. To select a binary option trading instrument, check such listed options in the exchange. Also, remember that binary options are always settled in cash and do not involve exchange of any instrument.
