Binary Options Definition
- Published: Tuesday, 04 November 2014 11:09
- Written by Stephan
In the financial sphere, it is more often to hear or to read the term binary options. In doing so, it involves a quite recent trend which receives more and more supporters. Yet what are binary options exactly by definition and which explanation is there to explain them? In any case, the first point to be made is that the products belong to the speculative investments and are to be classified under the rubric of derivatives.
On one hand, binary options have common characteristics with the classical options available on the market but differ from “regular” options on some important points. The term “binary options” was therefore, chosen because there are only two “possibilities” with this type of speculation, like the case with the 1 and the 0 in the binary system – either the trader predicts the direction of the price development correctly and makes a profit or he is wrong and experiences a loss.
What is the functionality of binary options?
After that the question “What are binary options?” has been answered, a lot of newcomers in this field would obviously still like to know how the trade with these special options functions. Meanwhile, in the case of binary options there are more types of trading but the functionality can be best explained through simple call and put options. Firstly, every binary option underlies a financial instrument which is referred to as the base value, underlying or the asset.
This can be a share, an index, a commodity or a currency. Trading with options is a matter of the performance of this asset. To begin with, the trader picks a base value on which he wants to speculate by means of a binary option. Now the trader must only decide whether he is of the opinion that the price of this base value is considered to have fallen or dropped from the current position of the X point.
Profits and losses in the case of trading with binary options
The trader must thus decide upon three things, namely upon a base value, a duration (of the option) and therefore, whether the price shall rise (call option) or drop (put option). If the trader has, for instance, bought a call option with the base value of gold and if the gold price is higher than at the time of purchase when the option is due, the trader makes a profit of mostly between 70 and 90 percent.
Whereas if the price at maturity is lower than the time of purchase of the binary option, the trader has lost his investment - unless the broker provides a so-called loss coverage which as a rule, can amount up to 15 percent. One can try this very well and without risk by using a binary option demo account without a deposit.