binary options

Binary Options Jargon

binary options jargonUnderstanding the jargon of the binary options market is critical if one is hoping to trade proficiently. The world of derivatives trading is esoteric at best, absolutely bewildering at worst.

Binary Options, like any other form of financial venture, is not something you just jump into full speed ahead. A certain amount of preparatory research is required and, as with any other venture into a foreign country, you need to learn at least a few basic terms. Failure to understand the language isn’t going to get you your money back if you’ve gotten it wrong. The following is a primer on the basic Binary Options terms you need to know:

Assets

Asset: also called underlying asset, this refers to stocks, commodities, indices, foreign currencies, and other instruments of trade.

Boundary instrument

Also referred to as a “Boundary Platform”, “Range instrument”, or “Range Platform”, this is a set of values you’ve chosen for the value of your trade to fall within (Inside) or without (Outside), as opposed to above or below a set amount.

Calls

A Call means your estimate is that the value will be higher when time expires than it was when you bought it. A put means the value will be lower when the contract expires.

Commodities

Commodities refer to raw materials – electricity, oil, gold, pork bellies, etc.

Current price

This means the price is shown as it happens, not on a time delay. You want “current price” because in trading, a delay of even a minute can significantly impair the decision-making process.

Digital option:

Another term for Binary Option, this is a fixed return based on a successful outcome of the trade.

Early closure

Also called “option buyback”, this is an option to close the contract early, causing immediate expiration. There are limitations and restrictions of use and you won’t receive the entire value of the contract but it can be a way to mitigate the damage if you’ve made a disastrous call.

Exotic options

Exotic options are options that deviate from the norm. They have added twists that can make them quite complicated and even dodgy. For example, a “Bermuda option” is a contract that has payouts at incremental dates up until maturity. It’s called a “Bermuda” option because, like the island, the option is halfway between the European style option (which only pays out on maturity) and the American style option (which can pay out at any time). From the standard trading point of view, binary options are a form of exotic option. It’s best to wait until you have a firm grasp of the basics before you venture into the fancier type of options and trades.

The asset’s value at closing is called the Expiry level.

Expiry Time

The Expiry time, or time of expiry is the date and time at which the contract closes and the expiry value is determined.

Fundamental Analysis

Fundamental analysis is a way of determining an asset’s intrinsic value based on large-scale events such as national economics, central banking policies, and major political events. The basic tenet is that while asset prices might temporarily go off the rails, eventually they will correct themselves.

High and Low

If you’re calling “high”, you’re making a contract that the asset will be worth more at expiry. A “low” call means your contract assumes the value will be worth less at closing than when it was struck.

Indexes and Indices

An Index or (plural) Indices is a basket of goods, the value of which is used as an economic progress marker, rather like tide markers in a waterway.

Your Investment amount, also called your stake is the amount you put into the contract.

If you called the contract right, you are in the money. If you didn’t, you’re out the money. For example, if you called “high” and the asset’s value went up, you’re in the money. If it went down, you’re out the money. Obviously, the reverse holds true if you called “low” and if it didn’t change at all, you’re at the money, or broken even.

Closing “in the money” nets you a predetermined Return. For example, closing in the money with a stake of 100EUR and a 65% payout will result in a return of 165EUR.

Stocks, like anywhere else in the financial world, refer to shares in a company. This is where analytical skills and world knowledge come in handy. Reading an article that America has just increased their export of biofuel or that Argentina has lost a significant percentage of pastureland could impact your decision to invest in the agricultural sector while an oil tanker disaster could change your inclination for a “call” to a “put” on oil shares.

Strike Price

The strike price (also called the target price) is the asset’s value at the time the contract was struck and is the comparison marker to determine whether the final value is high, low, inside, or outside.

Touch and No touch:

“Touch” means reaching or surpassing a predetermined amount anywhere during the contract term results in a payout while “no touch” means the asset will not reach a predetermined level. If the condition isn’t met, the trader loses the investment.

There is an infinite world of unlimited potential when it comes to investing. Taking the time to ensure the pool is filled with enough water and that you have a nodding acquaintance with basic swimming technique is a good way to reduce the angle of the learning curve and minimise pain and injury suffered from just running and diving in head first.

Image Credit: Subsetsum

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