An Introduction to Binary Option Instruments

binary option instrumentsThe 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 OptionsOne Touch OptionsKnock InsKnock OutsTwo Asset Binaries
Binary CallsOne Touch CallsDown & In CallsDown & Out Calls (K > B)Correlation Coefficients
Binary PutsOne Touch PutsUp & In PutsUp & Out Puts (K < B)Spread Options
Tunnel OptionsDouble No TouchUp & In CallsDown & Out Calls (K ≤ B)Binary Spread Eachway Options
Eachway CallsTimeline CallDown & In PutsUp & Out Puts (K ≥ B)Double Options
Eachway PutsPut TimelineDown & In One-Touch CallUp & Out CallsDouble Binary Eachway Options
Eachway TunnelsCall BankerUp & In One-Touch PutDown & Out PutsDouble Tunnel Options
Call AccumulatorsPut BankerDown & Out One Touch CallsDouble Eachway Tunnel Options
Put AccumulatorsOnion OptionsUp & Out One Touch PutsPyramid Options
Duke of YorkTug-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.

Terminology

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.

Blogs and Article Submissions

Should any reader wish to contradict methodology or reasoning, just comment, or for those wishing to contribute an article of a heavier nature then please send to hamish.raw@binaryoptions.com for review.

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