Binary options can be defined as a contract which upon the fulfillment of a specified condition or better to say, price movement, pays to the trader a predetermined fixed amount depending on the condition of his contract ending “in the money” or “out of money” at the time of expiry. If the contract ends “in the money” the trader is paid the fixed predetermined amount but if the contract ends “out of money”, the trader receives nothing.
Basically there are two types of binary options, the “cash or nothing” and the “asset or nothing“. In the cash or nothing type, payout is some fixed amount of cash if the contract ends “in the money”. Whereas in the case of asset or nothing binary options, if the contract ends “in the money”, the payout is the value of the underlying security. Thus as we see, there are only two outcomes and this is what the name ‘binary option’ suggests.“Digital options” is simply another name for binary options,when the term “digital options” is more commonly used in the trading of Forex and in the interest rate market.
Considered as one of the fastest and most popular form of simplified trading products, binary option offers fixed odds returns, with a structured reward and risk ratio. Binary contracts are available on a variety of assets like stocks, currencies, commodities and indices. Binary options trading are becoming increasingly popular among traders all over the world because they offer a high payout within a short trading duration and also offer some hedging features.
Advantages of binary options
The traders only have to anticipate the price direction of the asset and if at the time of expiry the anticipated direction of the asset is correct the contract ends “in the money”. Else if the anticipation is not correct the contract ends “out of money”. The payouts in the case of the contract ending in the money are fixed and the trader receives it irrespective of the fact as to how much the contract is in the money.
All or Nothing Options
Binary options trading can be described as a trading practice where the payoffs are predetermined. Whether or not the payoffs would be made, depends on the condition whether the option expires “in the money” or “out of money”. Hence if the option expires
“in the money” all is paid, else nothing is paid and for this reason the binary option is also known as all or nothing binary options. As the profit or loss in a binary option can be predetermined, traders and investors feel safe to invest in binary options.
The biggest advantage of all or nothing binary option is that the buyer and seller only have to decide the direction of the price movement. There is no need to determine the magnitude or the price so as to exercise the option. When investing with all or nothing binary options, it is essential to understand the interpretation of the prices of the binary options. Also care must be taken to step out of a trading position in good time, so as to incur minimum losses. If you sense that the trade is not going to go in your favor, you must act rapidly and step out of the trade. Therefore all or nothing binary option trading is basically investing to get all the money or nothing.