What Are Binary Options?

Having known what "Options" are all about, it will be wiser to take a look at what binary options are too.

With Binary Option, it’s all or nothing, you’re either right or you’re wrong.

That’s it!

The name binary option may sound too difficult especially for newbie, but it is a simpler way to trade than normal currency market.

Just like normal traditional options, Binary options have three significant characteristics you must know. There must be;

A Premium (Risked Capital), 

A Strike Price (Price at which you enter or targeted at), and 

An Expiration Period

The only difference you can see here is that, with binary options, the amount for the option (Premium) is chosen by the trader but in traditional option, it is usually determined by the market. 

Secondly, the expiration time frames or range in binary options are much shorter (From less than a minute to some days). But traditional options have an expiration time ranging from a week to even some couple of years.

These changes bring a very big difference between the duos. Moreover, the profits are calculated based on these factors too.

 How Binary Option Work. 

With binary options, the broker will definitely pay out a percentage of the premium risked if a trader met certain conditions placed on the underlying asset at an expiry time. 

That’s to say for example if the market price of the asset you chose to trade is at or beyond your target strike at expiration period supposing you placed a call option. You will receive a fixed profit regardless of how far the price move in favor of your prediction. If the market moves 1 pip or 500 0r even 1000 pips, it’s the same amount of profit payout assuming all traders risked the same amount. 

Profits are usually calculated as a percentage of the Premium.

I think this is why binary options are also called "all-or-nothing" options. You win by 1pip, you win all and if you lose by 1pip, you lose all. No question asked!

Let's take a look with example on how you can Make Money with Binary Options.

What Are Options?

Before we talk about what Binary Options are, it is very significant to know what options are and how they work in real market. 
Are you ready?

“Options" are simply contract that gives the holder the right to Buy or Sell an asset (Stock, Currencies, Metals, etc.) at a particular price (Strike Price) within a certain period of time and date (Expiration Time and Date). The holder of an option is not forced to Buy or Sell at that predetermined price, but has an option to act on it or take it if he wishes to do so with the aim of making profit, which is usually a percentage of the staked premium. Note that you can also loss as well should your prediction turns to the negative. In this case you forfeit the staked capital only. That's why these type of trades are referred to “Options”.
You have the ample right to take it or leave it. I hope you understand the game? 
We have two type options:
The “Call” Option (Going Long in forex) and
The “Put” Option (Going Short in forex) 

CALL option gives an investor the opportunity to BUY the underlying asset(s) at a predetermined price (strike price) within an expiration period. For example if an investor expects the price of an underlying asset to rise above the strike price before the contract expires, he would buy a Call option.

From the chart above, if an investor had bought a Call option at the strike price (green horizontal line). His trades would be in-the-money up to 19 hours time. But if he had purchased this asset after 4 hour (count 4 candlestick from the strike price or at Resistance),he would lose this trade especially at a shorter period of say 2 to 5 hours.

Now on the other hand, a PUT option gives an investor the right to SELL any chosen asset at the strike price. In this case, he believes that the market price of the asset will definitely drop below the strike price before the contract expiration time. Then he would buy a Put Option. 

                  

Another name for purchase price of an option is also called the "premium," That is the amount you are willing to lose should your prediction turns the other way round. In binary option, the premium is the only possible amount you will RISK or can lose when buying an option. 

The profit from an option is the amount the market has gone beyond the strike price minus the risked capital at the contract expiration. 

Let’s take a look at an example of what usually happens around us. 

Jojo saw a piece of land that presently worth $50,000. He sat down and thinks it will in nine months time. With full of excitement, he said to himself; 

“Boy, this gonna increase in value in nine months time, and I’m gonna bag in $37,500 as profit. And the location of the land is hot gee”! 

But he never wants to tie up $50,000 for a period of nine months in that particular investment. Good enough, he was lucky and a seller of the land offers to sell an option contract to him to purchase the land for $50,000 (strike price) in nine months from now. The seller offers the contract at a $2,500 premium instead of the whole amount.

Now Jojo agree and pays the $2,500 to the seller for the contract and wait to see if the value will rise. 

Let's say in nine months time as presumed, the land value increases to $87,500. Jojo has the option to decide or exercise his right to purchase the land at the agreed price (the strike), pay the owner the $50,000 contract price and now the land is his. 

Jojo’s profit on the land is calculated as the current value, $87,500, minus the purchase price (strike) plus the contract premium:

Mathematically;

Net Profit = Current Value – (Strike Price + Premium)

$87,500 - ($50,000 + $2,500) = $35,000. That’s a 70% profit I suppose, in just nine months.

Check the table of The size of your Capital at Risk for more information in a tabular format;

Do not start to jump into it yet. It is also important to look the other way round too.

Let's say that in nine months time, the land falls in value to $40,000. In this case Jojo is not obligated to exercise the contract and may not want to buy the land any longer because it has fallen in value. 

I think by now, his big mouth will shut without a command.

Well, he had to forfeit only the premium paid ($2,500) to the option seller, and nothing more or less.

Trading options is a great alternative to showcase your market ideas, strategy and system with limited risk.

I believe you’ve got some basic idea of how options work, right?

Ok, let’s take a look at what binary options are all about.