A classic binary option will only have two possible outcomes:
- You win, and get a predetermined award. (Usually cash, but can also be something else, such as a company share.)
- You lose, which means that your binary option becomes worthless and you lose what you paid for it. You can’t lose more than the purchase price.
This is what makes the binary option binary. It is a win-or-lose fixed-return option, also known as an all-or-nothing option. This makes it very different from a traditional option, where there is usually a sliding scale for how much you can profit from it. With a binary option, you know in advance exactly what you will be paid if the option expires in the money.
|BINARY: From Late Latin bīnārius (“consisting of two”), from Latin bīnī (“two-by-two, pair”).
As mentioned above, most winning binary options will give you a cash reward, but there are exceptions. You can for instance buy a binary option that is based on the market price of shares in a certain company, and if you win, you get a share in that company.
Predicting the future
Just as with ordinary options, binary options are all about predicting the future. You make a prediction about a future event and get paid if you’re right.
Examples of how a binary option can be designed:
- This binary option costs $50. If the USD/EUR exchange rate is below 1.1400 when it expires, you get paid $200 (making a $150 profit). If the USD/EUR exchange rate is not below 1.1400 when the binary option expires, you lose your $50 (making a $50 loss).
- This binary option costs $10. If the NYSE:SUNE price is below 1.30 when the binary option expires, you get paid $20 (making a $10 profit). If the NYSE:SUNE price is below 1.30 when the binary option expires, you lose your $10 (making a $10 loss).
One-Touch Binary Options are binary options where “one touch” is enough to determine if the option is a winning or losing one.
Example: This binary option costs $50. If the NYSE: GLD never goes below 120.00 during the lifetime of the option, you get paid $300 when the option expires (making a $250 profit). If the NYSE: GLD goes below 120.00 at any point during the lifetime of the option, you lose your $50 (making a $50 loss), regardless of where the NYSE:GLD is at the moment when the option expires.
Where can I buy binary options?
There are a lot of platforms online where you can buy and trade in binary options. Examples of good brokers include Ayrex and IQ options. They are usually open 24/7 every day of the week, including bank holidays.
Binary options that aren’t binary
Recently, binary option platforms have started to sell binary options that aren’t really binary. Instead of the binary win-or-lose with a fixed return, these “binary” options employ a sliding scale for profits, making them more similar to traditional options. There are also “binary” options that come with a consolation price if certain conditions are met.
Example: This is a binary option that costs $100. If f the USD/EUR exchange rate is below 1.1400 when it expires, you get paid $300 (making a $200 profit). If the USD/EUR exchange rate is not below 1.400 but still below 1.500 you get a $40 consolation price, meaning you only lose $60. If the USD/EUR is not below 1.500 you make a $100 loss.