One sort of options contract, known as a “binary option,” hinges on the question of whether or not the price of an underlying asset will exceed or fall below a certain threshold within a given time frame. The holder of such a contract needs to make no further choices about whether or not to exercise the contract once it has been purchased because they always expire in the same way.
A holder of a binary contract does not have the underlying asset’s right to purchase or sale, unlike holders of other types of contracts. At expiration, the holder will receive either the agreed-upon payout or nothing at all.
Binary Trading Terminologies
Use the online trading glossary to understand the terms of binary trading. The following are some basic trading terms:
Asset
Here, we name the underlying asset, which could be a stock, a commodity, a currency pair, or an index.
Call Option
A call option is a contract between a buyer and a seller that gives the buyer the right to buy the underlying financial instrument at a certain price and within a certain amount of time. Investors who think the value of an asset will go up (above the strike price) before the end of the contract’s time frame usually buy these.
If the market rises above the strike price by an amount equal to or greater than the cost of the contract, the contract owner will incur a loss equal to the contract’s cost. In binary trading, the most you can lose is the amount you put in at first, and the most you can win is set by the strike price.
Put Option
A put option is an agreement between two parties in which the buyer of the put option agrees to sell the underlying security to the seller of the put option at a certain price and time. Simply put, these are bought by investors who think the value of an asset will go down (below the strike price) before the contract ends.
The greatest amount you may lose while traditional trading is equal to the cost of the option itself; thus, your potential profit or loss is based on how far the market falls below the strike price. When trading binary options, your maximum loss is equal to your initial investment, and your maximum gain is predetermined by the strike price.
Underlying Instrument
The underlying asset in a binary trade These contracts can be based on a wide range of assets, such as currency pairs, stocks, and commodities.
At the Money
When the underlying asset and the strike price of an option are the same, this term is used to describe the situation. If the S&P 500 is trading at 1500 when you buy an option with a 1500 strike price, your option is “at the money” (ATM).
Refund
When an option expires at the time of market (ATM), the full investment amount is refunded to the investor.
Out of the Money
A losing binary option is one for which the trader has made an incorrect prediction of the future value of the underlying asset.
In the Money
If you accurately forecast the direction of the asset price, you will have a profitable binary contract, a circumstance described by this word.
Digital or Binary Option
A call option has a fixed risk and payout depending on the trader’s prediction that the underlying financial asset will close at or above the specified strike price, whereas a put option has the opposite.
Strike Price
An agreed-upon price at the commencement of a trade will determine whether or not the binary contract is in the money at expiration.
Option Expiry
The point at which a given binary contract ceases to be valid; this time period can be as short as 60 seconds or as long as weeks from now.
Early Closure
Possible termination of a binary contract prior to its stated termination date. Early closures may incur a price, and this feature is not offered by all binary trading companies.
Fundamental analysis
For now, all you need to know is that fundamental analysis is a means to evaluate the swings of a stock, currency, or commodity based on such political, geopolitical, demographic, macroeconomic, and other aspects.
Systematic Evaluation
It’s a way of analyzing data that relies heavily on recognizable patterns in price charts to project where an asset might be headed next. As a rule, it is mostly dependent on past price data and volume and pays little attention to fundamentals.
Expiry Level
The market value of the underlying asset upon the option’s expiration. A call option is in-the-money (ITM) and profitable if and only if its expiration price is higher than its strike price.
Conclusion
There are a lot of terms and expressions that may be foreign to you when you first start binary trading. Knowing their meanings is crucial. In order to get you up and running quickly, we’ve included a glossary of frequently used phrases above.
