Binary Call Option Explained

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Binary Call Option Explained

The binary options trader buys a basic binary call option if he is bullish on the underlying in the very near term. This basic binary call option is also known as the common “High-Low” binary call option.

By purchasing a basic binary call option, the trader is simply speculating that the price of the underlying asset will be higher than the current market price when the option expires, typically within next few minutes or several hours.

It is entirely up to the trader how much he wishes to invest with each purchase of the binary call option. The minimum and maximum he can put in with each call option varies across brokerages.

Moneyness

If the price of the underlying is above the strike price of the binary call option, the option expires in the money and the trader stands to receive a payout. Otherwise, the option expires out of the money and he loses his initial investment.

In the rare event where the price of the underlying asset is exactly the same as the strike price, the option expires at-the-money and the trader will simply get back his original investment.

Limited Profit

If the binary call option expires in the money, the trader receives a profit which is equal to the payout% multiplied by the initial investment.

Limited Risk

If the option expires out of the money, the trader loses his initial investment. This is also the maximum he can lose in this trade.

Binary Call Option Example

A binary options brokerage is offering 85% payout for the binary call option on EUR/USD which is currently trading at $1.30.

After tracking the price movement of EUR/USD for the past hour, the binary option trader believes that the price will rise over the next 5 minutes and decides to invest $100 to purchase a binary call option on EUR/USD expiring in the next 5 minutes.

If EUR/USD goes up to say $1.31 five minutes later, the investment pays off and the traders earns a profit of 85% of his initial investment, which is $85.

However, if the price of EUR/USD drops down to say $1.29 instead, the trader will have lost his initial investment of $100.

Note that it does not matter whether the price of EUR/USD skyrocketed up to $1.40 or flash crashed below $1.00, both the profit and loss will be fixed at $85 and $100 respectively.

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Binary Put Option

If the binary options trader is bearish on the price, he or she can buy a binary put option instead.

Continue Reading.

What are the Main Types of Binary Options?

Learn how the One-Touch, No-Touch and Range/Boundary binary options differ from the common high-low viety and how to trade them. [Read on. ]

What Assets can be Traded using Binary Options?

Many of the most popular financial instruments such as currency pairs, equities and commodities are available to trade using binary options. . [Read on. ]

Binary Options: Trading or Gambling?

Is binary option a legitimate financial instrument or just another form of gambling. [Read on. ]

Binary Options & Trading Robots: A Perfect Match?

Unlike humans, robots have no emotion and do not need to rest, so they can make a lot more trades than humanly possible, combined with perfect consistency. [Read on. ]

Is Binary Options Trading a Scam?

Learn how you can get scammed when trading binary options if you are not careful. [Read on. ]

How to Select a Binary Options Broker?

With so many scam brokers out there, before you learn how to trade, one must know how to separate the wheat from the chaff and find a trustworthy binary options brokerage. [Read on. ]

Binary Options: Calculating Breakeven Win-Rate for a Given Payout

How often does my trades need to be successful in order to be consistently profitable in the long run when trading binary options. [Read on. ]

Binary Option

What is a Binary Option?

A binary option is a financial product where the buyer receives a payout or loses their investment, based on if the option expires in the money. Binary options depend on the outcome of a “yes or no” proposition, hence the name “binary.” Binary options have an expiry date and/or time. At the time of expiry, the price of the underlying asset must be on the correct side of the strike price (based on the trade taken) for the trader to make a profit.

A binary option automatically exercises, meaning the gain or loss on the trade is automatically credited or debited to the trader’s account when the option expires.

Binary Options Outside the US

Basics of a Binary Option

A binary option may be as simple as whether the share price of ABC will be above $25 on April 22, 2020, at 10:45 a.m. The trader makes a decision, either yes (it will be higher) or no (it will be lower).

Let’s say the trader thinks the price will be trading above $25, on that date and time, and is willing to bet $100 on it. If ABC shares trade above $25 at that date and time, the trader receives a payout per the terms agreed. For example, if the payout was 70%, the binary broker credits the trader’s account with $70.

If the price trades below $25 at that date and time, the trader was wrong and loses their $100 investment in the trade.

Key Takeaways

  • Binary options depend on the outcome of a “yes or no” proposition.
  • Traders receive a payout if the binary option expires in the money and incur a loss if it expires out of the money.
  • Binary options set a fixed payout and loss amount.
  • Binary options don’t allow traders to take a position in the underlying security.
  • Most binary options trading occurs outside the United States.

Difference Between Binary and Vanilla Options

A vanilla American option gives the holder the right to buy or sell an underlying asset at a specified price before the expiration date of the option. A European option is the same, except traders can only exercise that right on the expiration date. Vanilla options, or just “options,” provide the buyer with potential ownership of the underlying asset. When buying these options, traders have fixed risk, but profits vary depending on how far the price of the underlying asset moves.

Binary options differ in that they don’t provide the possibility of taking a position in the underlying asset. Binary options typically specify a fixed maximum payout, while maximum risk is limited to the amount invested in the option. Movement in the underlying asset doesn’t affect the payout received or loss incurred.

The profit or loss depends on whether the price of the underlying is on the correct side of the strike price. Some binary options can be closed before expiration, although this typically reduces the payout received (if the option is in the money).

Binary Options and Regulation

Binary options occasionally trade on platforms regulated by the Securities and Exchange Commission (SEC) and other regulatory agencies, but most binary options trading occurs outside the United States and may not be regulated. Unregulated binary options brokers don’t have to meet a particular standard; therefore, investors should be wary of the potential for fraud. Conversely, vanilla options trade on regulated U.S. exchanges and are subject to greater oversight.

Real World Binary Options Example

Nadex is a regulated binary options exchange in the United States. Nadex binary options are based on a “yes or no” proposition and allow traders to exit before expiry. The binary option’s entry price indicates the potential profit or loss, with all options expiring worth $100 or $0.

Let’s assume stock Colgate-Palmolive Co. (CL) is currently trading at $64.75. A binary option has a strike price of $65 and expires tomorrow at 12 p.m. The trader can buy the option for $40. If the price of the stock finishes above $65, the option expires in the money and is worth $100. The trader makes $60 ($100 – $40).

If the option expires and the price of the Colgate is below $65 (out of the money), the trader loses the $40 they put into the option. The potential profit and loss, combined, always equals $100 with a Nadex binary option.

If the trader wanted to make a more significant investment, he or she could change the number of options traded. For example, selecting three contracts, in this case, would up the risk to $120, and increase the profit potential to $180.

Non-Nadex binary options are similar, except they typically aren’t regulated in the United States, often can’t be exited before expiry, usually have fixed percentage payout for wins (whereas Nadex payouts fluctuate based on the price paid for the option) and may not trade in $100 increments.

Basics of Put or Call Binary Options Trading

If you are new to trading online, then you will come across two common words in this industry and that is the put or call option. These are the most popular binary option trading words. Both these terms are related to primary asset price movement.

The put option is a term that will predict the price decline of the underlying asset and the call option will predict the increase in the price of the underlying asset. You will stand to make a profit only if your put or call prediction for the underlying asset is not above or below the strike price at the end of the expiration time and date.

Here is a list with the most trusted binary options brokers where you can start trading binary options with put or call actions:

The market conditions play a major factor in deciding between the put and the call option. If the markets are bullish, then investors feel that the value of the assets will rise and if the market is going through a bearish condition, then investors will want to sell off their assets. As you can make profits with both put or call options, binary options trading is very popular among traders.

What is call and put in binary options trading

Put Binary Option

You will be making a put binary option trade if you are confident that the chosen asset value will be lower than its strike price at the end of the trading period. The value of the commodity or the indices that you are trading on must have to be lower than what it started with for your prediction to come true and to earn profit for that single trade.

If the predicted value for the commodity or indices is higher than your put option, you will not be making any profit.

Call Binary Option

If you are placing a call binary option, then you are doing so with the hope that the option that you have chosen to trade with will end up at a higher price than what is started with at the end of the trading period.

If the commodity ends up at a higher price than the strike price at the expiration time, you will stand to gain a profit. It is basically the exact opposite of put binary option trading.

You should never make a put or a call option using only guesswork. It is very important for you to study the market behavior, latest price movement and carry out proper technical analysis before making a put or a call. You can use the available binary options tools to study the commodity’s price performance.

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