What are Binary Options?

Binary Options are a type of derivative options where traders bet on the movement of prices of underlying assets for a fixed amount in near future. As per dictionary, the word binary means something involving two i.e. there are two alternatives or choices. Likewise, in a binary option, a trader risks either of the two options buy/sell i.e. if the underlying price of the asset will go up or come down in future and the trader will get a fixed return if bet turns out to be favourable to him.

Thus, in binary options, a trader makes a profit if the underlying asset closes on a price higher than its strike price for a specific date.  This is said to be in-the-money. On the contrary, if the option expires out-of-money then it means that strike price is more than that of the underlying asset on its date of expiry.

Binary options are also known as digital options, all or nothing options, one touch options, fixed return options, bet options etc. Binary options thus compulsorily have a settlement in cash only on the date of expiry just as in case of European style option. There is a decided payout with the maximum time limit for the trader while taking into account the difference between purchase date and exercise date. Some critical elements of any binary option are as follows:

  • Cash settlement
  • Put/Call Option
  • Date of Expiry
  • The price of the underlying asset
  • Settlement price

 

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