There are three basic categories of binary options. There are the up/down binary options, range options and touch/no touch options.
Here we will explain what each kind of option involves, and we will discuss some of their more elaborate variations.
When binary option first appeared online, brokers used terms like “all or nothing” or “cash or nothing”. Back in 2008, brokers didn’t offer any returns at all when options closed out of the money.
Today, many brokers offer as much as 15 per cent back on losing options, so those terms no longer make sense.
Strike Price
The strike price is at the heart of the binary option. How it is defined is different for different types of binary options. It is critical that you understand this term, and what it means for the binary option you are considering.
Why is it so critical? The strike price is what is used to determine the final outcome of your binary option at expiry.
Up/Down Binary Options
Sometimes called Above/Below options or High/Low options, these are the most common binary options. In an up/down option, the strike price is the market price of the underlying asset at the moment the option is taken. If you decide to purchase an up/down binary option, you will either place a call option if you feel that the asset price will rise before expiry, or you will place a put option if you feel the asset price will fall during that time.
Range
This kind of option asks you to choose whether the price of an underlying asset will trade within a given range during the option period. For a range option, the strike prices are the boundaries of the price range.
Touch/No Touch
With a touch/no touch binary option, you will decide whether or not you feel an asset price with hit a pre-determined amount (the strike price) at least once during the option period.
These are the three basic forms of binary options. However, the field is expanding daily, and there are new types of options available all the time. Here are a few new forms of binary options.
Ladder
A ladder option is similar to an up/down option as described above in that with both, a trader decides whether an asset will finish above a set value at expiry. However, with a ladder option, the strike price is set higher than the market price at the moment the option is taken, so the asset will have to end up exceeding the strike price in order to end up in the money.
Target
A target option requires an asset to reach a set target within the expiry time. For example, GM must finish between +10 and +20. This is a set target and the boundaries of the target are the strike price. Remember that if you make a call option on this, and GM finishes at +9 or +21, your option finishes out of the money.
Hi/Lo
This is often confused with the up/down options explained above, but it is an interesting variation. In the hi/lo option, a trader decides if an asset will finish higher or lower today than it did at market close yesterday. There are also hi/lo options that involve a spread, asking if an option will finish by a set amount above or below yesterday’s close.
Tunnel
Sometimes this term is used to describe a range option, but there are variations that are different. One variation has the trader deciding whether the trading range of a set asset today will be above or below yesterday`s close.
Expiry Range
An expiry range is a variety of a longer-term binary option. With this kind of option, traders are choosing whether an asset will finish a given trading day within a given price range.
Break-Out
A break-out option requires the value of an asset to exceed, either above or below, the set boundaries of a specified range.
Pair Options
With pair options, you take two similar assets and specify which one with out-perform the other during the option period.
Short-term/Long-term
There are lots of options offering either long-term or short-term periods. It is interesting to note that the short-term options are offering shorter and shorter terms. The strategies for being successful are different for short-term options and long-term options. When it comes to extremely short-term options, many traders rely on their instincts. However, the market is very sensitive to breaking news and global events. If you are aware of a global event, and are comfortable with trading in the extreme short term, there is a chance to make large profits.
Fixed Options/Spreads
In general, binary options are fixed options because the potential risks and rewards are fixed from the outset of the option. Traders who choose spread options are risking greater loss and the practice requires more research. With a spread, a trader is buying or selling points, and the financial outcome of the option is determined both by the asset’s performance and the number of points purchased.
Summary
As the binary options market gets wider and more sophisticated, there is an increasing variety of binary options available. However, with all the new types, the core of binary options trading remains relatively easy to understand. In order to realize the great est returns, investors will still need to spend some time analyzing and understanding the details of every kind of binary option they are choosing.
Many traders appreciate that with binary options, the gains and losses are set and predictable. This helps make it clear what they stand to lose and how much they can profit.
