Exotic Options - Binary Options

RECENT NEWS
Benzinga  Jun 18  Comment 
Many investors are curious about binary options; they hear everything from ‘it’s a great opportunity’ to ‘it’s only for the big risk takers’. Most traders know very little about binaries. Probably the best way is to differentiate...
Benzinga  Jun 10  Comment 
So lately, there has been a lot of talk about binary options ; they are a simple trade, it’s a yes or no, the trader is either right or wrong and it’s winner take all. Well, that’s some of the story, but what it really boils down to is...
Market Intelligence Center  May 20  Comment 
How to pick a winner. For the first part of this series, and the May trade ideas, click here. Trade 1 Rationale The “US 500 Index” is naturally the S&P 500. From the past 24 years of history we know that this index closed on the last trading...
Market Intelligence Center  May 12  Comment 
Binary Options: a Flash Primer A binary option is simply a way to speculate if the price of an asset is going to go up or down in the future. For example, if you believe the price of a share of the German automaker BMW is going up you could buy a...
Benzinga  Apr 16  Comment 
Thinking of binary options as a 'yes or no only' proposition is the top mistake binary option traders make. Binary options have become a hot new topic. Most often binary options are thought of as a simple yes or no contract. Either the market...
Benzinga  Apr 8  Comment 
Binary options are a growing trading instrument expanding rapidly around the globe. As they continue to grow in popularity, many people weigh in with their opinion. Like most things in the financial world, people are quick to give opinions...
Benzinga  Apr 4  Comment 
With most binary platforms and brokers, you cannot close the binary option before expiration. However, on Nadex, every contract can be closed before expiration. Many traders are unfamiliar with this choice, and make the mistake of holding a...
DailyFinance  Jan 10  Comment 
VANCOUVER, BRITISH COLUMBIA -- (Marketwired) -- 01/10/14 -- The British Columbia Securities Commission is warning investors about Internet-based binary options trading platforms. The BCSC has recently become aware of RBOptions, an unregistered...
FX Street  Jun 27  Comment 
Many subtle aspects of Binary Options often go unnoticed by Binary Option traders. The most... For more information, read our latest forex news and reports.
Mondo Visione  Jun 6  Comment 
The Securities and Exchange Commission today warned investors about the potential risks of investing in binary options and has charged a Cyprus-based company with selling them illegally to U.S. investors. Binary options are securities in the...




 

This page is part of the Wikinvest Guide to Options. Related articles within this guide include:

Binary Options are options that pay either a fixed amount or nothing depending on whether or not a certain condition is fulfilled when the option expires. This is unlike a regular option whose payoff is dependent on the price of the underlying asset relative to its strike price. For example: A binary option on weather would pay out a fixed amount if the temperature exceeds a threshold.

Binary option are usually structured as European options -- i.e. the holder of the option is only paid if the underlying condition is reached upon maturity. However, there are American styled binary options which are automatically exercised (i.e. pays out) as soon as the price of the underlying asset equals the strike price.

The strike price for binary option is the main determinant of the pay out. For instance, a binary call option on oil with a strike price of $80 and payout of $100,000 would pay the holder $100,000 if the price of oil upon expiration is $80 or more.

Binary options are mainly traded over the counter, however, the CBOE offers binary options on S&P 500 and VIX which traded on an exchange. Option trading websites such as HedgeStreet have also made these options more accessible to retail investors. On the other hand, most casino games and bets with bookies are technically binary options. Many insurance contracts are also designed to be binary options.

Types of Binary Options

There are two popular types of binary options: cash-or-nothing options and asset-or-nothing options. With a cash-or-nothing option the holder is paid a fixed amount of money if the option is in-the-money upon expiration. An asset-or-nothing option pays the holder the value of the underlying asset if the option expires in-the-money.

No Touch Binary Option

No touch option enables traders to foretell whether an asset’s price stays above or below a certain level throughout the length of the contract. As soon as the asset’s price hits the specified level, the contract becomes worthless. If it still hasn’t touched that level at expiry, winnings are paid out.

Asset or Nothing

When traders buy a winning contract on Asset or Nothing options, they are given a unit of the asset, instead of a fixed amount of cash. Thus, the price of the asset at expiry determines the trader’s gain. The “asset or nothing” class is typically offered by non-traditional binary options brokers

Cash or Nothing Binary Options

This option pays out a previously agreed-upon price, as long as the price of the underlying asset is either above or below the strike price of the contract at expiration. The payout price and asset price are completely unrelated, in that winning traders get the same amount of cash whether the price is $1 or $100 into “in-the-money” territory.

One Touch Binary Option

One touch binary options are a type of option for traders who believe that the price of an underlying asset will exceed a certain level in the future but who are unsure about the sustainability of the higher price. This options are available to purchase on weekends, when markets are closed.

Boundary or Range Binary Option

The Boundary or Range binary options contract works by setting two levels on the contract. One is set 'above' the current market price and one is set 'below'. This contract is similar to the 'tunnel' trade in regular options trading where the payout is made if neither of the specified levels is 'touched' over the duration set on the contract.

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