How to Understand Binary Options. A binary option, sometimes called a digital option, is a type of option in which the trader takes a binary option trading uk or no position on the price of a stock or other asset, such as ETFs or currencies, and the resulting payoff is all or nothing.
Because of this characteristic, binary options can be easier to understand and trade than traditional options. An “option” in the stock market refers to a contract that gives you the right, but not the obligation, to buy or sell a security at a specific price on or before a certain date in the future. If you believe the market is rising, you could purchase a “call,” which gives you the right to purchase the security at a specific price through a future date. Doing so means you think the stock will increase in price. If you believe the market is falling, you could purchase a “put,” giving you the right to sell the security at a specific price until a future date. This means you are betting that the price will be lower in the future than what it is trading for now. Also called fixed-return options, these have an expiration date and time as well as a predetermined potential return.
Binary options can be exercised only on the expiration date. If at expiration the option settles above a certain price, the buyer or seller of the option receives a pre-specified amount of money. Similarly, if the option settles below a certain price, the buyer or seller receives nothing. Some binary options will pay out if the share price is met during the determined period. Learn how a contract price is determined. The offer price of a binary options contract is roughly equal to the market’s perception of the probability of the event happening.