Binary Option Terminology
Asset: The underlying financial instrument of the option. Usually a stock, commodity, index or currency pair. The value of a binary option is derived from the price of the underlying asset without the hassle of actually trading the asset itself.
Duration: Each binary option is contracted for a specified period of time. The final determination of an option's value is made at the selected expiration time. Usually durations vary from 60 seconds to 365 days.
Expiry time: This is the moment when the trade is closed.
Strike price: The price above/below which the option has to expire in order for you to win (usually the price of the underlying asset at the moment you place the trade).
Return: The Return in % you will get if the option expires above/below the strike price. Each option returns a fixed amount expressed as a percentage of the initial amount invested.
Time decay: How fast a binary option instrument go down in value if markets stay flat as expiry time approaches.
Binary option trades have three possible outcomes:
- In-the-money: The option expires in-the-money if your prediction was right and the option expired above/below the price level you specified when you entered the trade.
- Out-of-the-money: The option expires out-of-the-money if your prediction was not correct.
- At-the-money: The option expires at-the-money if at the expiry time the option’s target price is identical to the underlying asset’s price. If an option expires at-the-money, the investment amount will be returned.
Types of binary options
- High/Low (also known as Call/Put or Up/Down Options): You have to predict if the binary option will expire above or below the strike price. High options expire in-the-money when the market at expiration is higher than the strike price. Low options expire in-the-money when the market at expiration is lower than the strike price.
- One Touch (also known as Touch - No Touch Options): You have to predict if the option will touch or not touch a specified price level before it expires. Touch options immediately and automatically expire in-the-money if the market price reaches the option's target price at any time before expiration. No Touch options expire in-the-money if the market price never reaches the target price prior to expiration.
- In or Out Boundary Binary Options: You have to predict if the option will expire within certain price range. In Boundary options expire in-the-money when the option at expiration is within the boundary range. Out Boundary options expire in-the-money when the option at expiration is outside the boundary range.