An Introduction to Binary Option Instruments
The majority of binary option instruments analysed and discussed will consist of combinations of binary options. Binary option instruments (or for that matter conventional options instruments) consist of outright calls and puts, or combinations of both. The possible combinations double in number when the outright calls and puts are divided into a further two categories of options, European and American. The kaleidoscope of potential instruments is further expanded when barrier options, such as Knock-Outs and Knock-Ins, additionally contribute to the list. Variable strikes, expiries, barriers etc. create a limitless array of potential instruments, and then to cap it all, one can combine binary options with conventional options just to make it really interesting!
N.B. The term ‘instrument’ is often interchangeable with ‘strategy’. On this site an instrument refers to, for example, a binary call option, a binary put option, a tunnel option, a double no touch, etc.. Technical analysis and the like is referred to on this site as ‘strategy’.
Conventional Option Instruments & Binary Option Instruments
In the mature conventional options market probably in excess of 80% of all trades consist of combinations of calls and puts such as call spreads, put spreads, straddles, strangles, butterflies, condors etc.. There is no reason to believe that as the binary option market matures binary option instruments consisting of combinations of different binary options will similarly predominate the volumes traded.
If one then includes barrier options to this list of binary options instruments the percentage of structured binary option instruments volume to total binary options volume will rise from the 80% level as these particular forms of binary options do not have natural equivalents in the conventional options marketplace.
Table of Binary Option Instruments
|European Binary Options||One Touch Options||Knock Ins||Knock Outs||Two Asset Binaries|
|Binary Calls||One Touch Calls||Down & In Calls||Down & Out Calls (K > B)||Correlation Coefficients|
|Binary Puts||One Touch Puts||Up & In Puts||Up & Out Puts (K < B)||Spread Options|
|Tunnel Options||Double No Touch||Up & In Calls||Down & Out Calls (K ≤ B)||Binary Spread Eachway Options|
|Eachway Calls||Timeline Call||Down & In Puts||Up & Out Puts (K ≥ B)||Double Options|
|Eachway Puts||Put Timeline||Down & In One-Touch Call||Up & Out Calls||Double Binary Eachway Options|
|Eachway Tunnels||Call Banker||Up & In One-Touch Put||Down & Out Puts||Double Tunnel Options|
|Call Accumulators||Put Banker||Down & Out One Touch Calls||Double Eachway Tunnel Options|
|Put Accumulators||Onion Options||Up & Out One Touch Puts||Pyramid Options|
|Duke of York||Tug-of-Wars|
European & American Binary Options
In general there are two distinct forms of binary options and these are:
1. options that can be exercised prior to expiry and at expiry
2. options that can only be exercised at expiry.
Options that can only be exercised at or after expiry are termed European options, while the options that can be exercised prior to and after expiry are termed American options. And the nomenclature is clearly geographically totally irrelevant and meaningless!
Generally American binary options refer to ‘One-Touch Calls’, ‘One-Touch Puts’ or ‘Double No Touch’ options. A barrier option that does not convert into another instrument have a Knock-in or Knock-out feature that can be considered as the simplest of ‘one-touch’/’no-touch’ binary options strategies. Zero interest rates and yields are assumed throughout the analysis unless otherwise stated.
The terminology generally within the global options community differs not only from one geographical location to another, e.g. on one exchange a long call with two short calls is a ladder whereas on another it is a Christmas tree, but also differs from one product to another, e.g. time to expiry in the FX market is tenor.
‘Tunnel’ will generally be used in preference to ‘Corridor’, ‘Ranger’ or ‘Rangebet’.
A ‘Knock-Out’ strategy gets knocked out at the ‘barrier’ while the ‘strike’ within a ‘Knock-Out’ strategy determines the level against which the bet ultimately wins or loses. A Down-and-In Binary Call where may have the strike above, below or the same as the barrier.
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