A binary option is a financial product on an underlying asset or support (currency pair, index or stock). Potential earning is determined at time of purchase.
A binary option is a contract in which the trader chooses their predictions about the future price of a certain underlying asset. These predictions can be the same, higher or lower than a price chosen by the trader, this price is known as the exercise price or strike price. The trader also has to choose the time range for their prediction. Once this period is over, it will be seen if the prediction made by the trader is correct or not. If the trader is correct, they will win and otherwise they will lose.
How do binary options work?
With binary options the trader can make different bets:
- On the price of the underlying asset during the completion of the binary option. These are High/Low binary options.
- On the price that the underlying asset will reach at least once or never before completion. These are One touch binary options.
- On the price range in which the price of the underlying asset will be reached or not. These are the Zone or Boundary binary options.
Call options will be used when you want to obtain a potential profit linked to the advantages of the increases in the underlying asset. However, Put options will be used so that the trader can have a considerable potential profit when there is a drop in prices.
Binary options can be compared to gambling: if your forecast on the underlying asset is met, you earn the capital defined at the time of purchase of the option, if not – you will lose part of the invested capital.
Why talk about binary options on currencies? Is there any connection? How are binary options different from Forex?
The Forex market is a spot market, a market in which buy-sell contracts are executed at the moment and the trader pays the market price at that moment. In binary options the trader does not pay “a price” for the asset, they invest by speculating on the price direction of the underlying asset.
Another difference between the Forex market and binary options is the way we calculate the profit and loss of a trade. In the forex market when you buy and sell you pay the market price. Profit and loss are calculated by subtracting the price paid to close the trade minus the opening price. In binary options profit and loss are calculated as a fixed percentage of the invested capital. By opening a binary option you already know how much you can win and how much you can lose no matter how far the market goes.
Another very important difference is that in the forex market you can have operations open indefinitely while binary options have an expiration date established in advance and that, in general, it is very short-term and cannot be executed before or after this date.
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