Binary options guide: terminology
Binary Options – Binary Options are also called digital options or fixed return options. Trading binary options investor must make a forecast as for price direction of the selected asset (increase or decrease in value) at a time.
Call Option – call option is purchased by the trader in case he believes that the price of the asset chosen by him at the time of exercise is higher than at the time of purchase.
Put Option – put option is purchased by the trader in case he believes that the price of the asset chosen by him at the time of exercise is lower than at the time of purchase.
The Underlying Asset – in binary option trading the underlying assets can be shares and other securities, indices, commodities and currency pairs for which one can conclude fixed-term contracts.
In-the-money – this concept in binary option trading means that the investor is in profit during or after the auction.
Out-of-the-money – in binary options trading this concept shows that the forecast for the investor is not justified or is not being justified. That is, if you predict a fall in asset prices, and the price is actually growing, you will be out-of-the-money. When the option is exercised in the out-of-the-money state investors are not making a profit and losing money invested in the option. Note that the large platforms return 15% of investment to investors as an encouragement if the option was exercised out-of-the-money.
Time of Option exercise (runtime of the Option) – in trading Binary Options there are four times the option is exercised – the end of an hour, a day, a week and a month. This means that choosing the time (period) of the option, the investor selects a point of time at which he considers his forecast for rising or falling asset prices to come true. In other words, at the runtime of the option its duration ends, and at this moment it is determined if the investor’s forecast appears to be correct or not.
Level of Option exercise – in binary option trading this concept means the level of Option performance. At the time when the term of the option ends (that is, the option is exercised) the level of asset prices at the moment is the level of Option exercise. That is, if an investor has bought a call option which is valid until the end of an hour, at the end of an hour the value of the asset will be the level of Option exercise. The level of Option exercise is compared with the level of purchases and thus it is determined if the financial forecast was correct or not.
Strike price (option purchase level) – the value of the underlying asset at the time of its purchase. During the option exercise strike price (option purchase level) is compared with the level of option exercise and it is defined if the investor’s forecast is correct or not.
Commodity Option – a type of binary options which underlying asset is a commodity. In the commodity market more than 100 kinds of commodities are traded, but binary options trading platforms usually offer a choise of the most popular commodities such as oil, gold, silver, coffee, sugar, etc.
Currency Option – a type of binary options which underlying asset is a currency pair. Usually in trading binary options the traders are offered currency pairs of a major group, that is the main currency pairs such as EUR / USD, USD / JPY, GBP / USD, etc.
Stock Option – binary option on the shares or securities. Usually in binary options trading a trader is offered a choice of shares of the largest international corporations such as Microsoft, Coca Cola, etc.
Index Option – binary option which is based on stock indices, such as Dow Jones, RTS, DAX etc.
Deposit – the amount of money that a trader must deposit to the account opened in the trading site / platform to start trading.
Investment – the amount of money that the trader invests in the option purchase. Usually the minimum cost of a binary option is $ 25. If a successful financial forecast takes place the trader receives payment of a specified percentage of the chosen investment amount. A trader cannot lose more than their chosen investment amount if his prediction did not come true.
That’s all for now. Got any questions? Just ask the expert!