What are binary options?

Binary options are an instrument that has been present on the financial markets for many years. Recently, binary options have become very popular, which has been helped by the dynamically growing interest in investments in the forex market and the availability of online trading platforms for trading binary options. Binary options are an instrument related to a specific underlying asset, e.g. exchange rate, stocks, indices or commodities. Offering binary options is currently prohibited. Retail clients easily succumbed to the suggestion of easy profit and forgot about the compound interest (one coin toss is a 50% chance of winning, two correct throws in a row is only 25%). Big losses of investors caused the reaction of the financial supervision, which does not allow them to be offered in the European Union.

CALL option An investor who expects an increase in the price of the underlying asset, e.g. currency rate, will buy a CALL option. If, at a predetermined time (option expiry date), the price of the underlying asset rises above the option strike price (option expires in-the-money), the investor will receive a predetermined profit level, e.g. 80% of the invested amount.

PUT option An investor who expects a drop in the price of the underlying asset, e.g. the currency rate, will buy the PUT option. If, at a predetermined time (the option expires), the price of the underlying asset falls below the option strike price (the option expires in-the-money), the investor will receive a predetermined profit level, e.g. 80% of the invested amount.

If the investor's expectations regarding changes in the price of the underlying asset fail (the option will expire out-the-money), he loses the entire amount invested in the option, i.e. in the case of the CALL option, the price of the underlying asset at the expiry of the option will be below the option strike price in the case of a PUT option, the price of the underlying asset at the option expiry will be above the option strike price.

Binary options - necessary deadlines

CALL - call option. An investor buying a CALL option expects that on expiry of the option, the price of the underlying asset will be above the strike price of the option (the option will expire in-the-money).

PUT - put option. An investor buying a PUT option expects that on expiry of the option, the price of the underlying asset will be below the option strike price (the option will expire in-the-money).

In the money - means that the binary option has expired and brought the investor a profit. In the case of a CALL, the option will expire in money if the price of the underlying asset is above the strike price of the option at the time the option expires. In the case of a PUT, the option will expire in money if the underlying asset price is below the option strike price at the time the option expires.

Out-the-money - means that the binary option has expired and did not bring the investor a profit, i.e. he lost the funds invested in a given option. In the case of a CALL, the option will expire out of money if the price of the underlying asset is below the strike price of the option at the time the option expires. In the case of a PUT, the option will expire out of money if the price of the underlying asset is above the strike price of the option at the time the option expires.

At-the-money (with money) - means that the binary option has expired and did not bring the investor profit or loss, i.e. at the expiry of the option, the price of the underlying asset was equal to the option strike price.

Option strike price - in practice, in relation to binary options, this price, compared to the price of the underlying asset at the time the option expires, allows to determine whether the option has expired in-the-money or out-the-money.

Expiry Price - The price of the underlying asset at the time the option expires.

Option expiry time - the time at which a given option expires. The option expiry time may vary and range, for example, from as much as 60 seconds to several days.

Find more information here: Binary options Broker Reviews