Types of Binary Options

Binary options are also known as Fixed Return Options or FROs for the reason that the payout amount is fixed and predetermined. The trader simply has to anticipate the direction of the price of the underlying asset or instrument and decide whether the price would go up or go down without considering other factors.
Binary option is considered to as one of the simplest form of trading. As the payout is fixed the traders are aware of the potential profits or losses.

Thus the risk is limited but the earning potential is large and this is the reason for the popularity of binary options. All types of options trading have two variants; the call option and the put option.

Call option: the right of a trader to buy a contract at a predetermined fixed amount is called the call option.
Put option: the right of a trader to sell a contract at a predetermined fixed amount is called a put option.


Types of binary options

There are many types of binary options and the differentiation is marked by the fulfillment of certain conditions, which validates or invalidates the option. The payout is predetermined by the trader and if the conditional scenario is fulfilled, he gets the fixed predetermined payout. The different types of binary options are discussed as below:

1. One Touch: as the name suggests, this is the scenario where the trader sets that if the price of the underlying asset, for e.g. currency trades at a specified rate, then he would receive the predetermined profit. Here the rate of currency as decided by the trader is known as the trigger. If in such a case the currency does touches the trigger, the trader is bound to get the predetermined amount of payout. Therefore the trader in this case is aware of the potential profit or loss.

2. No Touch: just as the name suggests, the trader sets the condition that he would make profit only if the currency does not reaches or does not touches the specified trigger before the specified time. Here an important thing to note is that if the trigger is far away from the spot rate, the payout would be less as the probability of the currency not touching the strike rate is high.

3. Double One Touch: in this type of binary option, the trader can set two triggers and they make the predetermined profit if either of these triggers is hit. Double one touch option is generally traded when traders expect high volatility in the market not knowing, which direction the market would take. In this way the double one touch options is similar to the long straddle or strangle option.

4. Double No Touch: double no touch options can be considered as opposite of double one touch options. In this type of trade, the traders trade on the condition that the

currency would not touch either of the triggers set by the trader. This type of option is generally traded when the traders expect the market to be range bound with low volatility. The double no touch option is profitable during the periods when there is significant moves in the market which lead to consolidation.

Traders use different strategies to be successful at options trading and often combine various option types. These option types are also combined to minimize the risk. some traders claim to have developed infallible methods of trading while others treat options trading as a hedging instrument and use it to secure their funds.

Classification of binary options

1. The binary options have also been classified as per the nature of the reward of each option. As per this classification there are two types of binary options namely the “cash or nothing” binary options and “asset or nothing” binary option.

Cash or nothing: as the name suggests, under this option type, the payout of a successful trade is the predetermined amount of cash and if the trade is not successful the trader receives nothing.

Asset or nothing: similar to the cash or nothing classification, this type of option pays out the value of the underlying security in case of a successful trade, else the trader receives nothing.

2. Another classification of binary options is on the basis of the style of trade as American style or European style.

American style: in the American style of trading binary options the options can be exercised the moment the price of the security touches the strike price.

European style: in the European style the options are exercised only after the expiration time and the security price is compared to the strike price only after the expiry period. Here if the strike price is reached before the expiration time, the trader loses his right to claim his reward.

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