Binary (digital) option are types of binary options in which a trader either gets a fixed amount of the underlying value of the asset or is left empty handed at the expiry of the contract. The whole phenomenon works on the predictions and calculations of the trader, as in which direction the value of the underlying asset will move. It requires careful analysis of all the factors affecting the movement of the prices. The risk content in such kind of options is comparatively less, as the traders know beforehand about the associated profit or loss. Binary options can only be traded at the time of expiry. They can be traded on stocks, indices and commodities.
types of binary options
Options have primarily two main trading kinds: Call Options and Put Options. Call Options give the trader right to buy an option for an amount that is predetermined. Such options help incurring profits in the bull market, where the prices of the assets tend to move upward. Put options give the trader right to sell an option at the strike price. These are exercised in bearish markets, where the trader tries to make profit taking benefit of downward trend of prices of assets.
There are different types of binary options available and their categorization is based upon certain set of conditions that make them valid or invalid. The payout of all the binary options are specified in the contract and is settled only after the trader finds them to be appropriate according to the relevant conditions.
Discussing about various types of binary options, we have
1. Up and Down Options: These are the most commonly traded binary options. As the name signifies, the trader can exercise either of the alternatives predict precisely if the price of the underlying asset will increase or decrease by the expiry time. The trader forecasting a jump in the price in comparison to the current price at the time of expiration will take out a Call Option, while the trader predicting a slump in the price in comparison to the current price at the time of expiration will exercise a Put Option. The trader with an accurate prediction will have a win-win situation and the option will be in-the-money.
2. Touch Options: In touch options, the trader will have a profitable situation if the predicted price of the underlying asset touches a predetermined price barrier as specified in the contract. The price barrier or the trigger value of the underlying asset can be set at a premium or at a discount of the current price of the option. The trader has to touch-up or touch-down the trigger value. It is also known as One Touch Option. The profit spills for the trader if the estimated price touches the trigger value at the time of expiry, otherwise loss occurs. No Touch Options, which are less popular, can incur profits only when the price does not touch the trigger value. Double One Touch Options provide the trader right to fix two price barriers for a particular asset and if the price touches either of the barriers, profit is made.
3. Boundary Options: As the name suggests, the boundary options have a predetermined range of price. Upper Boundary and Lower Boundary. The trader has to speculate if the price of the underlying asset will move within this specified range or will go out of it at the time of expiry of the contract. The prediction of the price of such options requires analysis of the volatility of the asset. The higher the volatility of the asset, the more it has chances to go out of the boundaries or go Out Range; the lower the volatility, the more it has chances to fluctuate within the given range or In Range. In case of non-volatility of an asset, its better to predict within the range.
4. Pair options: These options are new in the basket of binary options and are categorized as exotic trades. In such derivatives, two assets are paired against one another. The investor has to speculate the relative movement of value of one underlying asset in comparison to that of the other asset. The trader incurs profit if the prediction associated with the relative prices of the assets proves accurate at the expiration date and vice-versa.
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