Nov. 22, 2012
-- A binary option is a fixed return option since there are only 2 possible outcomes which are fully realized in the onset of the contract.A binary option is a contract that gives the client (known as the owner) the right, although not the obligation, to purchase an underlying asset at a fixed price within a specified time frame.The items being traded are called underlying assets and so they might be a product range: currencies (e.g. USD/JPY), commodities (e.g. Oil, Gold), stocks (e.g. Microsoft, Coca Cola) or indices (e.g. Nasdaq, FTSE 100). The fixed price where the owner buys or sells at, is known as the strike price.
When trading binary options, the buyer of the option chooses whether he thinks the underlying asset will hit the strike price by the selected expiry time - this can be at the end of the nearest hour or the end of the day, week or month.The owner places a call option on his binary option trade if he thinks that at the expiry time the option will be greater than the current price. He places a put option if he thinks that at the expiry time the option will be under the present price.
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In this way binary option trading is quite flexible. The asset, expiry time and predicted asset direction can be controlled by the owner of the investment who can select each as he desires. The only unknown factor is that if the asset will expire higher or lower that its existing price.The returns from binary option trades are set from the onset of the contract. If the option expires in-the-money after that buyer get between 65-71% profit on the investment amount. If an option expires out-of-the-money then with anyoption(TM)
, the purchaser get a 15% payback on his initial investment. The certainty of binary option trading makes it a frequent method of trading for most investors since not just is a potential gain known from the offset, but moreover the potential loss has limitations.
The real difference with trading binary options to traditional trading is the fact in binary option trading, a buyer is just trading on the performance of an asset - they'll not actually own the asset itself.
For a binary option trade to become profitable, the option must only move in the predicted direction - the magnitude from the move isn't relevant hence its easier to get a payout.Binary option trading is incredibly flexible, because of multiple expiry times and dates, the range of underlying assets on offer and the capacity to trade online without the need for a broker.
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