Binary options are a form of financial trading where traders profit from taking positions on one of two possible outcomes of the contract. The word “binary” means two, so binary options means that the trader can gain by trading either one option or the other, or profit from one of two options.
Originally the exclusive preserve of players with financial muscle in the Over-the-Counter arena in the early 70s and 80s, binary options became very popular as from 2008 when liberalization of the process took place to allow the participation of everyday people on the street, as a safer and less risky form of investment than forex and other financial markets, which at the time were in turmoil.
Binary options have some unique characteristics that set them apart from other types of investment. These are as follows:
- There are only two possible outcomes for a digital option contract, and these outcomes are not only price dependent.
- All option contracts have a time limit. In other words, bets made in this market can expire, and the expiry time or date can be determined by the trader or by the broker.
- Different asset categories are found in a binary options platform. It is possible to bet on stocks, indices, currencies and commodities in one digital option platform.
- The trader’s loss cannot be more than the invested amount, and the money made on the option cannot be more than the listed payout, irrespective of the degree of pip movement.
Traders can bet on web-based trading platforms or on mobile trading platforms using internet-enabled phones (including smartphones). Traders are able to deal in the binary options arena using a variety of contracts that are broker-dependent.
The following are the different types of binary options contracts. Each one comes with two options and only one out of both can be chosen in order to make money.
- Call/Put trade contract: This is the flagship contract which is available on all trading platforms in the market. It goes by several names: Up/Down, High/Low, Rise/Fall and Above/Below. In this contract, the aim is to make money from betting on whether the underlying instrument will end up higher or lower than the market entry point, which is the price on bet execution.
- Touch/No Touch trade contract: This contract type involves selecting a price level to be used as the benchmark target. This is known as the strike price. An asset is chosen and a strike price is set either by default or in a customized manner), and a trade is placed on whether the strike level will be attained or not by the time the contract expires. A correct prediction leads to more money in the account.
- In/Out: The In/Out option trade is also known as the Boundary, the Tunnel or the Range bet, depending on the nomenclature that is used on the trading platform. The In/Out contract is self-explanatory. Two strike levels are used. If the asset ends in between both levels by the time the trade is over, this is a successful IN bet. If the instrument touches or breaches any of the boundaries so as to either end above the upper target or below the lower target, this is the OUT bet.
- High Yield: These are binary option trade contracts that have a high yield payout approaching 500%. One of these is the High Yield Touch, which involves setting one price target either above or below the entry point at some considerable distance. The other is the High Yield Boundary bet, which involves setting two price targets that would constitute the boundaries of the bet at some distance from the entry point. The hallmark of the bet is the extreme difficulty in achieving the targets for the contract, hence the high financial reward for those who are successful in trading it.
- Speculative Bets: These include the run bets and other short term trade contracts such as the 60 seconds bet. They have very short expiry times and this makes it very difficult to predict the outcomes. They can also give good financial benefits if traders play them correctly.
The exact option bets available on a platform will depend on the trading platform or the broker that is used for the trading activity. Being able to bet in several ways provides a boost to the money-making potential of this market.