What is Binary Option
A binary option is a type of option in which the payoff is structured to be either a fixed amount of compensation if the option expires in the money, or nothing at all if the option expires out of the money. The success of a binary option is thus based on a yes or no proposition, hence “binary”. A binary option automatically exercises, meaning the option holder does not have the choice to buy or sell the underlying asset.
Investors may find binary options attractive because of their apparent simplicity, especially since the investor must essentially only guess whether something specific will or will not happen. Binary options have a large observable difference from vanilla options. They are occasionally traded on platforms regulated by the SEC and other regulatory agencies, but are most likely traded over the Internet on platforms existing outside of regulations. Because these platforms operate outside of regulations, investors are at greater risk of fraud.
For example, a binary options trading platform may require the investor to deposit a sum of money to purchase the option. If the option expires out-of-the-money, meaning the investor chose the wrong proposition, the trading platform may take the entire sum of deposited money with no refund provided. The two main types of binary options are the cash-or-nothing binary option and the asset-or-nothing binary option. The cash-or-nothing binary option pays some fixed amount of cash if the option expires in-the-money while the asset-or-nothing pays the value of the underlying security. They are also called all-or-nothing options, digital options (more common in forex/interest rate markets), and fixed return options (FROs).
On non-regulated platforms, client money is not necessarily kept in a trust account, as required by government financial regulation, and transactions are not monitored by third parties in order to ensure fair play. The most popular types of Binary Option trades that you can place online are the Put and Call type options. These types of options will have a specific time period on which you will be hoping that your prediction on whether the value of the option you are trading will end up higher or lower than it started. There is also another type of binary option known as one touch binary option. The main different between One Touch Binary Options and all other types is that as soon as the asset reaches a pre-determined price then that Binary Option trade is completed, and as such if you think for example that any asset will reach a certain level then you only have to see that asset reach that price at any time during the time period allocated for your trade to be a winning one.
Even if the price of the asset touches that pre-determined level but then goes up or down in value as long as its reached that pre-determined level the trade will be deemed to be a winning one and will be closed there and then and you will have, if you place a successful prediction, be paid your profit. If the price of the chosen asset never reaches the pre-determined value then you will have placed a losing trade.