A binary option, sometimes called a digital option, is a type of option in which the trader takes a yes or no position on the price of a stock or other asset, such as ETFs or currencies, and the resulting payoff is all or nothing. Because of this characteristic, binary options can be easier to understand and trade than traditional options. 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. 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. Some binary options will pay out if the share price is met during the determined period. Learn how a contract price is determined. The offer price of a binary options contract is roughly equal to the market’s perception of the probability of the event happening. Learn the terms “in-the-money” and “out-of-the-money.
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. 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. A purchase that gives you the right to sell the security at a specific price until a future date. If you think the market is falling, you can purchase a “put.
A purchase that gives you the right to purchase the security at a specific price through a future date. If you think the market is rising, you can purchase a “call. A contract that allows you to buy or sell a security at a specific price on or before a certain date in the future. A “put” and a “call” are different options.