What is a Binary Option?
A Binary Option is a method of profiting from the movement in stocks without having to finance the purchase of that stock. A Binary Option has two possible outcomes (thus binary). The investor will either make a predetermined percentage profit or will lose the investment completely. There are two basic forms of Binary Options. There are “call options” and “put options“. The payouts for binary options are always predetermined and you can see them clearly on any Binary Option Broker’s site.
Call Option:
When an investor invests in a call option he/she is expecting the stock to go up by the end of the option period. If the stock price ends up above the call option strike price the trade will be “in the money” and the predetermined percentage profit will be made. If the stock price ends up lower than the call option strike price than the trade will be “out of the money” and the investor loses his/her investment.
Put Option:
If the investor invests in a put option he/she is expecting the stock to move down by the end of the option period. If the stock price ends up lower than the put option strike price the trade is in the money and the predetermined percentage payout will be made. If the stock price ends up higher than the put option strike price than the trade is out of the money and investor loses his/her investment.
Binary Option Brokers pay a fixed percentage of your initial investment when the option is in the money. This payout percentage can vary by broker and by asset. The common return range is between 65% and 85%. Many brokers, but not all also offer a rebate on losing trades. These are typically between 5% and 10%.
Call Option Example: We will provide you with an example of a typical call option traded on a fictional Binary Option Broker, “OptionBlast”. For this particular option, OptionBlast is offering a payout of 80% if the call option ends up in the money and 5% if the option ends up out of the money.
Investor buys a call option for $100.00 in company XYZ (fictional). XYZ is trading at $60.00 at the time of the option purchase. The strike price is $61.00. If XYZ is trading above $61.00 at the option expiration the trade will be in the money and the investor will get his 80% return from OptionBlast and now have $180.00. If the price of XYZ is below $61.00 at the option expiry the trade will be out of the money and the investor will receive his rebate of $5.00 from OptionBlast.
Put Option Example: We will provide you with an example of a typical put option traded on a fictional Binary Option Broker, “OptionBlast”. For this particular option, OptionBlast is offering a payout of 75% if the option ends up in the money and 10% if the option ends up out of the money.
Investor buys a put option for $100.00 in company XYZ (fictional). XYZ is trading at $60.00 at the time of the option purchase. The strike price is $55.00. If XYZ is trading below $55.00 at the option expiry the trade will be in the money and the investor will get his 75% return from OptionBlast and now have $180.00. If the price of XYZ is above $55.00 at the option expiry the trade will be out of the money and the investor will receive his rebate of $5.00 from OptionBlast.
A big advantage of using Binary Options as a trading / investing tool is that Binary Option Brokers offer varying expiration times on their options. An investor can purchase an option that ends in minutes, hours or even days. There is no specific date that the options expire as there is when purchasing a conventional option.
Please remember that any investment in financial instruments involves risk. We suggest that you do research before trading with any Binary Option Broker. Please click here for our exclusive Binary Option Broker reviews.
