Binary TradingWhile a lot goes into finding success trading binary options, you have to begin with the basics. Here are 12 binary options terms every beginner must understand
This is simply the financial instrument described in an option’s contract. It’s the subject of the prediction you’re making about which direction its price will go.
Stocks are common underlying assets in binary options. A company’s stock is comprised of shares which represent pieces of the hole. By purchasing shares, you are investing in the company, but in binary options, you aren’t doing this. Instead, you’re putting money behind a prediction you have about which way the stock is going to go.
A commodity is something like gold, silver, crude oil, emissions credits, etc. They’re not companies, but they still have prices that rise and fall and, thus, you can buy contracts on them.
This refers to the foreign currency market. The prices of currencies rise and fall relative to others as well. While many people simply play the forex market, you may elect to leverage binary options and use these currencies as your underlying asset.
The strike price is the price of an underlying asset at the time you decide to purchase the option.
Every option comes with an expiry time. This is essentially when it will expire and, thus, when your prediction has to come true by if you are to collect. Once the expiry time has been reached, the binary option can no longer be traded.
Expiry times will differ from one broker to another. You can find them as small as 60 seconds and as long as 24 hours. They’re generally organized like this:
- Short Expiries: 1 to 5 minutes
- Medium Expiries: 5 minutes to 2 hours
- Long Expiries: 2 hours to 24 hours
There’s no ideal expiry time for trading binary options. It comes down to the underlying asset and your preference as a trader.
A call is the same as saying you think the price of an underlying asset is going to increase. It’s the same thinking that would compel you to buy a stock in traditional trading: you believe its price will go up in the future.
The difference with trading binary options is that the price must go up – and sometimes more, depending on the contract – by the expiry date you agreed to.
On the other hand, if you believe that the price of an underlying asset is going to go down, you’ll be investing in a put. Again, this would be the equivalent of shorting a stock in traditional trading, but the action must occur by the expiry date outlined in the contract.
In the Money
Whether you chose a call or put, if you were correct in your prediction – and are thus going to get paid – you are considered to be in the money.
Out of the Money
If your prediction didn’t pan out by the time the expiry date was reached, you will lose your investment and are therefore out of the money.
This situation is incredibly rare, but it’s worth bringing up. If, at the time of the expiry date, the strike price of the underlying asset you invested in hasn’t gone up or down, but has instead stayed in place, you are at-the-money and will get to keep your initial investment.
As an investor, you need a broker to facilitate all of your trades. They are the firm that will also decide payouts for certain deals. There are countless brokers out there to choose from and they will have a huge impact on your results as a binary options trader.
While there is still a lot standing between you and success, these 12 binary options terms are an essential step toward progressing as a trader.
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