Guides

January 9, 2012 | By: Chris Morton
+Chris Morton

Binary options provide the investor with either a fixed payout if the criteria of the option are met or nothing at all. The options are therefore binary in nature because there are only two possible outcomes.

Binary options are defined in terms of a strike price (payout threshold), a maturity date, and an underlying reference unit, commodity, instrument or security price (the underlying). Binaries are sold in exchange for an up front premium payment and both “Calls” and “Puts” are available.

What makes Binary Options interesting is that the investor receives a fixed payout as a return based on whether the financial market is above or below a specific level at a specific time. This means that the option buyer can look for a specific payout based on a small move in a financial instrument. When trading standard options, the market has to usually move a great deal for there to be a payout. The structure set up for binary options provides the opportunity for a significant payout, with relatively small moves in the underlying market.

This market is quite simple to understand and, once an investor trades binary instruments, they will quickly understand the benefits relative to other options markets. Binary options are priced in a manner that is similar to those of standard options. In general, options traders have to analyse the strike price, the underlying price of the financial instrument and the implied volatility of the underlying financial instrument to determine if there is value in the call or put that he is planning on purchasing. Short-term binary options eliminate most of the issues related to standard options.