What Are Binary Options

Binary options is a term that is frequently used in Finance. Binary option is basically a kind of option where payoff is a fixed amount of some kind. It is usually a European style of investing option. In American Stock Exchange they are known as Fixed Return Options or FRO. The options available are mainly binary in nature and hence the name of this payoff option is binary option. There are primarily of two main types as explained in brief below:

Cash-or-nothing Binary option” This type of binary option pays some kind of fixed amount in cash even if the option expires in terms of money.

Asset-or-nothing Binary option” This type of binary option only pays the underlying security value of the asset when the option expires in terms of money.

If you still have not been able to understand what a binary option is then here is an example to help you understand. Consider that a particular binary option of cash-or-nothing purchase is made at $100 with a binary option payoff at $1000 on the Company A’s stock. So now when on the maturity date the stock trading is at or above a value of $100 then $1000 is received. However if the value of the stock traded is anything lesser than $1000 then no value will be received at all.

Binary options are usually considered to be a simple and a fast way to take a view on spot forex rates, stock indexing futures, commodity futures and economic events that have a very limited risk factor. For example at times they are simply yes or no question propositions like “Will Gold be valued above $152 at 12.00pm ET today? If you think it is “yes” then you simply need to go ahead and buy some stock and if you think the answer is “no” then you need to see some stock if you own some. There are couple of strategies that one applies when answering these kinds of questions but mostly they are based upon gaining at one instant and then again losing at yet another instant.
Different types of trading agencies allow different kinds of options in binary options trading. The range of market that you can look out to for binary options are mainly derivatives of a wide range of underlying markets:

  1. Binary options are available on key economic events in the financial calendar. It also includes the rate decisions and payroll figures.
  2. The trading on commodity futures is rather simple and binary options are based as low cost contracts on the future of prices like metals, energies and agricultural commodities.
  3. Spot Forex constitutes of the futures of major US, European and Asian equity prices and is one of the easiest propositions where one can use binary options to take a stand on.
  4. Spot Forex is one of the toughest of the four basic kinds where binary options come into play. This requires to trade frequently as in daily, weekly and hourly even using Forex contracts using a fraction of the capital.