The principle of operation of binary options is to fix profits and losses. Therefore, binary options are called a fixed profit instrument. Regardless of what you trade: currency, raw materials or stocks, you can calculate the risk of losses and profits, thereby choosing the best strategy for your trading.
The binary option itself gives you the right to buy an asset at a pre-agreed price. Let’s look at an example. If you have the right to buy an Apple share for $100, you will be able to earn if the hay stock is higher. Let’s say the stock has grown to $300, you buy something with a “discount” of $200 and sell it right away.
Therefore, it is important to remember that the option is a right.
Investors and traders trading binary options can always determine in advance the degree of their win or loss, which is very convenient for calculating financial investments.
A binary option (digital option, all-or-nothing option, or fixed-profit option) is an option that, depending on the fulfillment of a specified condition at a specified time, either provides a fixed amount of income (premium) or does not bring anything. Since the option is bought in advance at a fixed price, the total is either positive (in the amount of the difference between the premium and the option price) or negative (by the value of the option). As a rule, the size (module) of a positive result is smaller than a negative one. – Wiki definition
Examples of binary options trading:
Buying an option to exceed the price level. If the value of one share of Apple is 50 US dollars, it will take at least 1000 US dollars to purchase a lot of 20 shares. If the share price rises to $55, then the return will be $100 (20 shares x $5) at a 10% yield. Income can have other meanings, depending on price fluctuations. If the price is unfavorable, then the trader will have a choice – to close at a loss or wait for the price to rise. Alternatively, you can buy 2 binary call options at a price of $10 with the condition that Apple shares reach a price of $55 before the end of the week. The price of the executed option will be equal to 100 dollars. If the price really reaches $55 or is higher, then the trader will receive $200 (100 x 2) at a cost of $20, the income will be $180, and the yield will be 900%. If the price does not reach the specified level, then he loses the $20 paid for the option.
Buying an option to increase the price from the current level. Believing that by the end of the day, Microsoft shares will be worth more than at the moment, the trader buys a binary call-option at a closing price higher than the current one for 10 US dollars with a possible premium of 17.10 dollars (a yield of 71% of the invested funds). If by the end of the day Microsoft shares really rise in price, then the trader will receive 17.10 US dollars (profit 7.10 dollars). If the value of the shares decreases, then the trader will lose the invested funds.
Sale of an option to exceed the level. At noon, the euro against the US dollar (EUR/USD) is 20 pips behind the previous day’s closing price (price at 20:00 London time). An option to exceed the previous day’s level of EUR/USD can be sold at $38 or bought at $41.50. The trader decides that the price will not recover and sells 2 options at a price of $38, receiving revenue of $76. The worst outcome for the trader would be the closing price of the day EUR/USD higher than the previous one, which would lead to the estimated price of the option at the level of 100, which the trader would be required to pay. Its risk is limited to (100 – 38) x 2 contracts = $124. If the underlying instrument does not end with an increase on this day, then the option will lose its value, and the trader will not have to pay anything to anyone, while he has previously received $76, which becomes his profit.
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