What is Binary Options?
Binary options are a new category of investments in which traders can forecast which direction they expect their option to move by the time of expiry. Once an investor purchases a binary option on any given platform, this gives the investor the right to buy the underlying asset at a particular price and with a fixed expiry time.
Binary options are also known as fixed return options, digital options or all or nothing options. Take note that there are 2 outcomes that are possible with binary options trading: in-the- money or out-of-the-money.
An example of a binary option trade is an investor purchasing a Google underlying asset for $100, with the view that Google will be trading higher than the purchase price at the end of the hour. If the investor’s forecast is correct then they will receive the predetermined return on their investment, such as 75%.
In this example the traders would receive a payout of $175 (100 + 75) for his trade expiring in-the-money. If the option expired lower than the level it was purchased, then the trade would be out-of-the-money. Rates for this scenario vary from 0-15%, depending on which broker and underlying asset you trade.
It is important to note that the larger the investment the larger the potential payout. Also, the payout is known from the outset of purchasing the option.
Binary options allow for flexibility as traders can make instant profit once their option expires. This is one of the most simple and interesting types of investments on the financial markets.