Decoding Binary Options

Even though binary options are categorised as exotic options, they are one of simplest options to understand and execute. One of the most common binary option is to be known as a ‘high low’ binary option. “In stocks, foreign exchange and commodities, a typical binary option (High-low) is also known as a fixed return option (FRO)”, says a trader of a leading company of binary option trading in India.

Since every option has a strike price, if a trader predicts correct action on the market direction and the price of security/currency is at a correct side of the strike price at the time of expiry date then a trader is paid a fixed return no matter how the market moves. On the other side, if the trader predicts incorrectly then he loses the whole amount of the money he invested.

Let us understand the concept with an illustration, Mr. X, a trader perceives that a market is soaring and on that basis he bought a call option under binary trading. If he would have thought that the market is going down then probably he would have chosen a put option. Now, for a call option to make profit, it has to be more than the strike price on the expiry of the purchase. Similarly, for a put option to make profit, the price has to be less than the strike price on the expiry of the contract.


Binary Option Example

Let us assume that your own analysis shows that the index is going to rise for the remaining day, the sentiments will remain positive but you can’t quantify. In this scenario, you decide to get the binary call option while predicting the price at the expiry will be above 1,750 (the index is currently at 1,750).

You must note that the binary options time range vary from minutes to months. Therefore according to the situation you must choose the suitable time frame. According to your analysis, you selected an option which expires in 30 minutes from the time of purchase of that option. This option will give you 69% profit if the index is above 1,750 at the time of expiry within 30 minutes, if the index is below 1,750 on the 30th minutes from now, you will lose your money.

How much can you invest?

You can invest as much as you want to be, please remember, since the probability of winning and losing is almost equal, you must invest according to your risk appetite. Also the investment amount varies from broker to broker. A good forex broker will charge a minimum spread. Also many brokers have their fixed minimum and maximum amounts. You can check these guidelines with your broker.

Let us continue with the above example, you invested $100 in the call which has a time frame of 30 minutes.  The price at the time of expiry is to be the last quoted price or it can be average of bid and ask price, different brokers have different expiry price rules.

Now, you made profit since the market was at 1,753 at the expiry of your call option you make $60 profit, which is 60% of $100 and get your principal amount too, in that way you made $169 from $100. If market was below 1,750, you would have lost your $100 also. If the market was on 1,750 itself at the time of expiry then the common practice is to just get the principal amount with no loss-no profit. Therefore, you must create your own binary options strategy according to the market.

Since Binary Options Market is not regulated one, it is an over-the-counter market (OTC), each broker may have its own set of rules. Therefore it is crucial to select the right broker.

The risk to reward ratio of binary options are well known and it is very easy to understand also, but the trader must have some perspective. It doesn’t matter how much the market moves up or down, the result is fixed in only two outcomes, either you make profit or you lose all. You just have to make a decision whether the market will go up or down. It is that simple.

Contact your broker now to get the details.