NO19 - 3 Types Of Binary Options

"Binary options contracts are speculative bets that you make on the direction of the price of the underlying security. But binary options are not just about betting on the direction. In fact there are different scenarios that you can bet on. If you search for a binary options broker, chances are that you will come across many different types of customized binary options products. However, there are three main types of binary options that are common to all binary options brokers. In this article, we break down the three most commonly traded binary options trades that you will come across. You will also learn why some binary options types offer higher returns compared to others. Binary options can be used as a way to make money quickly, but if you are wrong you can just as easily lose your invested capital. Therefore, it is good to have an understanding of the three most common binary options types."

In the previous article, we briefly touched upon how binary options work. In this article, we will outline the different types of binary options that are available. Now when it comes to crafting these financial products, you will find various types.

But among the different types of binary options there are three types of binary options that you will come across with most binary options brokers. The payouts vary depending on the way these binary options work.

With some binary options, the payout is not that high, but as you dig deeper into more exotic binary options, you will find that the payout is much higher. Of course, higher the payout, the higher that the binary options contract will end up in the money.

But before we go into the details, let’s briefly explain the concepts of in the month and out of the money. These are two terms that you will come across when trading binary options.

What is in the money binary options?

An in the money binary option is where your contract is when the contract closes with a profit. For example, if you purchased a CALL binary options contract on a EURUSD, this means that you are expecting the price of the currency to rise from the price at which you bought (of course within the time constraint).

When the strike price is higher than the price at which you bought, it is called an in the money binary option. When the contract closes, you will get the guaranteed payout.

What is an out of the money binary option?

An out of the money binary option is one where the contract closes with a loss. Let’s say you again bought a CALL option in EURUSD with a one- day expiry. You speculate that the price of the currency pair will rise in a day. But your speculation turned out to be wrong. Therefore, you risk your invested amount. This is a binary options contract that closed out of the money.

Three types of binary options

In this section, we will discuss the three types of binary options contracts that you will come across.

Vanilla or regular binary options

The vanilla or the regular binary options are your CALLs and PUTs. These are also simply called the CALL/PUT option. With this type of binary option, you are speculating on the direction of the underlying security.

Thus, when you expect the price of a security to rise, you will buy a CALL option and when you expect the price of the security to fall you will buy a PUT option. Within the CALL and PUT option, you will find contracts with different expiry times.

Some of the most common expiry times are 60-second options. In this contract, you are speculating on the price in a 60-second time frame. You can also purchase CALL and PUT option for longer duration such as an end of day option expiry or end of week option expiry. Some binary option brokers also allow you to trade a monthly or a quarterly expiring option.

Touch, No Touch or One-Touch

With the above types of binary options, you are speculation whether the price of the security will touch or not touch or touches the price just once during the option contract’s lifetime.

The payouts here are higher. But don’t expect these exotic options also known as touch options to be easy. The price level is often set by the binary options broker, so you need to be very careful and do your homework. Quite often, such options end out of the money.

But if you get lucky, the payouts can be higher than 100% or more than the amount you invested. The risk of your option contract ending out of the money is just as high as well.

The touch options often come with custom expiry times.

Range or boundary options

As the name suggests, with such types of binary options you are making money by speculating whether the currency or the underlying instrument will trade in a range or not. These are similar to touch options expect that you will be betting whether the options contract will stay within the specified range or if it will breakout from the specified range within the time frame of the options contracts.

These contracts also have a higher payout because it is very easy for your range options to expire out of the money. The range or the boundary that is specified is set by the broker and this is something to consider if you want to trade these more risk exotic options.

In conclusion, the above three types of binary options are the most commonly traded options contracts that you will come across. They can go by different names but the behavior of such options remains the same.

Read 969 times Last modified on Sunday, 12 May 2019 08:03