Binary Options

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Definition: Binary Options



Full Definition of Binary Options


Binary options is a financial instrument that allows you to speculate on future market movements of underlying assets. Some regulatory bodies consider binary options to be financial instruments and regulate them as such. Other jurisdictions consider binary options to be a way to bet on the stock market and regulated the instrument as gambling. Both classifications have their merits and the truth is that binary options are somewhere in between the two classifications. They have no value if they mature outside the money-making them similar to gambling but they are based on financial assets. The movements of these assets can be predicted by a skilled trader making it more like investing than gambling.

Binary options have become one of the fastest-growing sectors of the finance industry. While the basics of binary options can be learned within a few minutes, there are numerous advanced strategies that traders and investors can learn in order to increase their chances of receiving a high return payout.

Binary options are high return, short term investments traded by both professional traders and amateurs. Based on exotic options, which are only traded on private markets, binary options are traded over the counter and available 24 hours a day, 6 days a week.

If you refer to binary options as gambling you imply that they are governed by luck. This is not the case. The trade is skilled-based.

If you refer to binary options as an investment you imply that they have a persistent value. This is not the case. They are worthless if the mature outside the money.

None of the two definitions makes binary options justice. The best way to look at them is as a way to speculate on future market movements and make large profits on Small movements.

How Do Binary Options Work?

There are several different types of binary options. Each type work slightly different. Classical Options are the most commonly traded and most popular type of binary options.

Each binary option is based on an asset. It is the market value of this asset that is going to decide if the option matures on the money or not. The asset can be a stock, a currency pair, a commodity or an index. When you buy a binary option you are speculating that the market value of the asset the option is based on will be above or below a certain value at a certain time in the future. This time is referred to as the time when the option matures. The option might mature in as little as 15 seconds and in as much as a month. The market value of the asset in the time leading up to the maturation of the option does not matter. It is only the value at the exact time of maturation that matters.

(There are types of binary options such as one-touch and no-touch options where the market value during the maturity of the option matters. But this is not the case with classical options)

If you correctly predicted the value of the asset then the option will mature in the money. When this happens you will earn a high return on your investments. Often 80-90% or more.

If you were wrong then the option is worthless and you lost the money you invested.

You can quickly earn a lot of money if you’re skilled at choosing the right options to buy.

TRADED AGAINST THE BROKER

There is no open market for binary options and there is no 3rd party involved in the transaction when you trade with binary options. The broker acts as underwriter for the option and offers it for sale on their marketplace. They get the money when you buy an option and they make a profit if the option matures outside the money. They lose money if the option matures in the money.

All binary options are designed to give the broker a statistical edge that will allow them to make money. You will lose money if you buy random options and hope for the best. It is possible to overcome the statistical edge and make money by skillfully analyzing the market and using this information to pick options with a high probability to mature in the money.

High Risk

Binary options are high-risk instruments and there are countless stories online about people who have lost a lot of money trading binary options. There are also a lot of people who have earned a lot of money.

We do however not recommend binary options trading. The risk is too high and it is harder than most people think to make money. Binary options are only suitable for skilled day traders.

Benefits of Trading Binary Options

There are many benefits to trading binary options when compared to more traditional options trading or other investment vehicles. These benefits range from the potential profits, to the ease of use. While binary option trading is not a perfect fit for everyone, most investors, from absolute beginners to seasoned veterans, find it to be an exciting, profitable way to invest.

High Return

Binary options are an excellent choice because of their high return. While most traditional stocks and options must mature over time, binary options generally yield 75% – 81% or more in as little as one hour.

Short Term Investment Option

While traditional options can take years to mature, the majority of binary options expire within one week, one day or one hour or less than an hour. This means that an investor can make between 170% – 181% on a single contract in one hour or less. If the strategy being used is sound, a trend in the market can continue to be used time and time again as long as it holds true, enabling the investor to double their investment every hour so long as the trend continues. On the other hand, if an investor would like to refine their strategy and choose another option or direction to purchase, options expire in a relatively short amount of time and on OptionBit, you can even buy your option before the time of expiration to minimize your risk.

Small Investment Friendly

Binary Option is also extremely accessible to investors who want to invest small amounts of money. With binary option, an investor can follow a market trend and almost double their investment, yielding enormous profits. By diversifying carefully as profits are generated, prolonged profits can be sustained and help build a buffer against potential losses.

Calculated Risk and Reward

One of the biggest advantages of binary option trading is that the return on initial investment is fixed. From the onset, the amount of potential profit or loss is known. This means that a trader will never lose more than they expected and can calculate their risk as perfectly as possible and that there is a cap on how much can be earned or lost in a single trade. Since the rate of return is quite high, and trade times are short, in the long run, the fixed rate of a binary option can be a huge advantage.

Advantages in Volatile Markets

Finally, binary option trading has an immense advantage in volatile markets, because it offers a somewhat safe way to continue investing. While traditional investments can be rocked by the volatility of the market, and huge losses can be incurred, the fixed rates of binary options mean that no matter how drastic the swings in the market, the fundamental principles remain the same.

This combination of a high fixed return, relatively transparent risk, and short contracts means that binary option trading can produce very high returns on an initial investment. Even a relatively small investment can, in a short period of time, produce massive profits.

One Pip Only

In comparison to other types of day trading, where your profits are determined according to the delta between the price you bought the asset and the price you sell it at, binary options do not require more than one pip in order to be in-the-money. While forex trading and other forms of online trading require that you have three pips just to start trading.

Binary Option Basics

Parameters

  • The Asset – The first component of a trade, is the asset. Depending on which binary option broker you choose, you’ll have a range of assets from different financial markets, like stocks, commodities, currency pairs and indices, that you can trade binary options on. Some traders choose to specialize in one asset, or one market, while others trade a collection of options simultaneously.
  • The Contract / Time of Expiration – The next component to trading is the binary option contract. Most binary option brokers offer contracts that expire in one month, one week, one day, or one hour, but on OptionBit’s trading platform you can also trade options as short as 15 minutes or buy an option just five minutes before it expires. It’s important that you know just how much time there is before the option expires so that you can make an accurate prediction.
  • The Forecast or Prediction – Your job as a trader is to determine which direction the price of an asset will move before or at the time of expiration. If you believe that the price of underlying asset will increase, then you should choose the Call (Above) option. If you think that the price of the underlying asset is going down you should choose the Put (Below) option. If you are correct in predicting which direction the price of an underlying asset will move, you’ll receive a high return on your investment between 75 – 81% — nearly doubling your investment.

Types of Binary Option

Three types of binary options, Above / Below, Touch and Range. Traders can achieve great flexibility with their trading by exploiting the unique characteristics of each type.

Above / Below

Above / Below is the most popular type of binary option and the one that the majority of traders are familiar with. Based on “cash-or-nothing”, Above / Below binary options expire in-the-money when the trader correctly predicts if the price of the underlying asset will move above or below the predetermined strike price by the time of expiration. Like with all binary options, payouts are known from the onset so that traders know where they stand before buying the contract.

Touch

Touch options are another type of binary option available on OptionBit. Touch options expire in-the-money if the price of the underlying asset touches a predetermined barrier by the time of expiration. Price barriers can be higher or lower than the current price of the underlying when the option is purchased, enabling traders to take advantage of the traditional omnidirectionality offered by binary options. OptionBit also offers variations on Touch, including “Touch Up” and “Touch Down”.

Range

Range is the third type of binary option offered by OptionBit. Based on tunnel trading, Range options have a predetermined upper and lower boundary. When buying a range option, the trader must predict whether the price of the underlying asset will stay “In” or go “Out” of a predetermined range at the time of expiration. This way the trader can trade on the volatility of the asset – If he or she thinks that the asset volatility is high, he or she can buy an “Out” of the range option. On the other hand, if the trader thinks that the option is not volatile, he or she should buy an “In” range option.

Analysis of Binary Options

There are many factors involved in direction that assets move, a fact which is readily apparent even to new investors. However, successful traders can analyze information and make educated predictions before they choose their options. There are two main ways to analyze the market, through fundamental analysis and through technical analysis. Both methods may be used independently or in conjunction with the other.

Technical Analysis

Technical Analysis is the process of analyzing statistics and data about specific options in order to more accurately predict which direction the asset will move. There are many different methodologies used in technical analysis, both objective and subjective, including means reversion, tracking momentum or moving average convergence divergence (MACD), trend following, and pattern recognition.

Fundamental Analysis

Fundamental analysis is a method of prediction that looks at available facts to come up with an idea of how the market will move. These facts may come from public statements, news reports, current events, and virtually anything else that might impact the value of an asset. The fundamental analyst then examines that collected data to try to predict new trends in the market.

Basic Strategies

  • Bullish Strategy – A bullish strategy is employed when a trader believes that the price of a specific asset will follow an upward trend and gain value.
  • Bearish Strategy –  A bearish strategy is employed when a trader believes that the price of a specific asset will follow a downward trend and lose value.
  • Range / Volatility Trading – Range trading, or volatility trading as it’s sometimes Called, gives traders the ability to trade on a range of prices. For example, if a trader believes that the price of Gold is fairly stable, he or she can purchase an option that is “In” the range. On the other hand, if the option appears to be volatile, the trader can buy an “Out” of the range option.
  • Fence Trading – Fence trading gives traders the opportunity to win no matter what direction an option moves.

While the most common binary option assets are fairly traditional, like commodities, stocks, indices and forex, one advantage binary option trading has over many other financial exchanges is that option trading is not limited to a specific market, index, or asset. This means that if a specific asset isn’t available, you’ll be able to choose from a variety of assets on open markets around the world–giving you the opportunity to trade 24 hours a day, 6 days a week.


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Definition Sources


Definitions for Binary Options are sourced/syndicated and enhanced from:

  • A Dictionary of Economics (Oxford Quick Reference)
  • Oxford Dictionary Of Accounting
  • Oxford Dictionary Of Business & Management

This glossary post was last updated: 15th April, 2020 | 8 Views.