Binary Options Review
There are a few terms you need to know to be able to understand stock options and how to make your first trades. I will be referring specifically to American options, and I will note later some of the differences between American options and European options. Incidentally binary options are quite a bit more like European options, only they trade with a much shorter duration.
The basic explanation is that like the meaning of the word “Binary”, with Binary Options, there are only two possible outcomes. You were either correct in your prediction and you therefore make profit, or you were incorrect, in which case you lose your money. How much do you make or lose from Binary Options? Well, that depends on your initial investment, but there is no issue of experiencing huge unexpected losses or making astronomical profits.
The right to buy a specified amount of shares (usually 100) at a specified (strike) price on or before a specific date. Contracts may be executed any time prior to expiration (American options only). Binary options are purchased in fixed dollar amounts and act more like European options – executed only at expiration.
When a trader predicts that the instrument will decrease in price. Even if the instrument then decreases by a tenth of a cent, you profit from such a Binary Option.
Options which can be executed profitably – where the spot price on the underlying security is in a favorable position relative to the strike price of the contract. In the case of a call option, the spot price would have to be above the strike price. In the case of a put option – the spot price would need to be below the strike price. In the case of a binary option, a fixed yield is paid out at expiration for in the money options, typically somewhere between 60-81% – fixed at purchase of the contract.
If you “win” the investment is known like “money.” By example, if you place a call option and the price increases, then it is “In the Money” binary option .
Options which can not be executed profitably – where the spot price on the underlying security is NOT in a favorable position relative to the strike price of the contract. In the case of a call option, the spot price would have to be below the strike price. In the case of a put option – the spot price would need to be above the strike price. In the case of a binary option, a fixed return of capital invested is paid out at expiration for out the money options, typically somewhere between 0-15% – fixed again at purchase of the contract.
If the price of the instrument is identical at the expiry date to the amount that it was at the trading time. In this scenario, you were neither right nor wrong, in which case, your investment is returned to you in full with Binary Options. The time or date of expiry of binary choices and the price is examined depending on the platform.
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