As the name suggests, it has the dual option, either yes or no. Yes, it means it comes with a payout of a certain amount or nothing at all. In the financial transaction, the binary option is itself a product where buyer and seller are involved.
In trading of binary options, a buyer does not own any asset. He instead bets on the price of the asset. An asset’s price whether will increase or go down the strike price. The strike price is the price at which the asset is being traded on that day and time.
As mentioned above, Binary Options Traders do not own a real asset like gold, shares. They only guess the movement of the market, whether it will increase or decrease within an expiring time. If the guess is right, the buyer will win and earn as per the agreement, and if his guess is not right, he will lose all the money.
Is it confusing? Let us take an example. Suppose the price of a share is trading at Rs. 3124 on a certain day. Mr. X (a trader) guesses it will be higher (yes), or it will go down (no).
Now Mr. X (trader) buys some shares. Now, if the shares trade above Rs.3124, suppose at Rs. 4321, the trader will receive a payout as per the agreement.
If the price goes down, i.e., below Rs. 3124, the trader’s guess is wrong, and he will lose all his investment.
How it works?
A binary option works on its own. That means when the expiry time is expired, the loss or gain is automatically credited or debited to the buyer’s account. So, the buyer either gain or lose his entire investment. So, that is ‘yes’ or “no”.
If we see this trade from another perspective, it is likely to be more like sports betting than a real business. The difference is that it is betting on financial assets. It is a volatile or virtual market. You cannot touch it. Only can predict. If your prediction is true, you are king, and if not, you are a loser.
A “Put Option” is one type of security that a trader buys by paying a small premium when he thinks the index may decline. This ‘Put Option’ gives the ‘option holder’ the right to sell a certain quantity of securities at a specified price within a specified time. This certain quantity is 100 shares, ‘certain price’ is the strike price, and ‘certain time’ is a time of expiry.
This put option is utilized for maximum profits. The ‘Put Option’ holder can fix the selling price if he expects a decline in the underlying asset market. So, if the trader pays a small premium and buys, ‘Put Option,” he may escape losses.
As the trader owns the right to ‘put’ or sell the stock to somebody, it is known as “put.” As “Put Option” is a right to sell, it allows the trader to lock in a minimum price.
But the trader is not bound to sell at ‘minimum selling price’. For example, if the market price is higher, he may sell the stock at market price, not exercising the ‘minimum selling price.’
Although trading of Binary Option is not a scam, it requires hard work and much research.
Read other important articles in the binary glossary.