Binary option trading is predicting whether something will or will not happen to the price of an asset within a predefined time frame or at a predefined time.
They are called binary options because there are only 2 possible results. You either win the maximum amount or lose the maximum amount. If your prediction is correct you will get your investment back and win a predetermined % of your investment as profit. If your prediction is incorrect you will lose your investment.
At 10:50 a Euro is worth 1.33571 US Dollars. You invest 100 m฿ that it will be higher than that at 11:00, with an 81% payout.
At 11:00 the EUR/USD has gone up to 1.33572 (or anything higher) you receive 181 m฿, made of your 100 m฿ investment and 81 m฿ profit!
At 11:00 the EUR/USD has gone down to 1.33570 (or anything lower) you receive 0 and have lost 100 m฿.
In the above example
- EUR and USD were the “underlying assets”.
- 1.33571 was the “entry price/target price”.
- You made a “call” option wagering that the price would rise. If you wagered the price would fall that would have been a “put” option.
- In scenario 1 1.33572 was the “exit price/expiry price”.
- In scenario 2 1.33570 was the “exit price/expiry price”.
- In scenario 1 you finished “in the money”.
- In scenario 2 you finished “out of the money”.
For more terms please see our glossary of binary option terms.
Types of binary options
There are 3 main varieties of binary options offered by brokers. Here they are in order of popularity.
High/low binary options let you make a prediction on whether the value of an asset will be up from its current price (a call option) or down from its current price (a put option) at the time it expires. The above basic example is a high/low option.
The most popular time frames in which to trade high/low options are
- 60 seconds
- 5 minutes
- 10 minutes
- 15 minutes
- 1 hour
- 1 day
The longest you are likely to see is 1 month but they could work with any time frame.
The payout % the investor receives if they correctly predict which direction the price moves, ranges from 70%-85%. Lower payout rates are probably poor value markets to be avoided unless you have a trading strategy with a very high win rate.
One touch binary options allow you to predict whether the value of an asset will touch a certain price point at any time before the option expires. The common time frames are longer than those for high/low options, the most popular are
- Within 1 hour.
- By the close of trading.
- Within 1 day.
One touch options are usually offered on improbably high or low target prices relative to the price at the time you take the option. When this is the case they give a high payout %, typically from 160% – 500%.
Boundary binary options allow you to predict if the value of an asset will remain within a certain price range or be outside that price range at the time the option it expires. Outside can be either above or below the range, as such you are not predicting the direction of the price but rather you are predicting the volatility/stability of the price.