A binary put option is a type of financial contract in which the buyer profits if the market price of the underlying asset falls below the predetermined strike price at the expiration time.
Binary Put Option in a nutshell
- Binary put options allow investors to speculate on the decline of an underlying asset’s price.
- These options provide a fixed payout if the asset’s price falls below a predetermined strike price.
How does a Binary Put Option work?
Binary put options are financial products that can be particularly interesting for investors and speculators. Buying binary put options that are out of the money with a lower premium is more pleasant than betting on particularly risky bets. It can make calculating downside risk easier than selling binary call options. They can be traded on various binary brokers using proper binary options risk management guides and indicators.
Good to know:
Selling binary call options is the same as buying binary put options with the same strike price & expiration date.
What is the underlying value of a Binary Put Option?
The underlying value of a binary put option, is also known as a downbeat or all-or-nothing option. It is settled at 100 if it is in the money (at expiration) or zero if it is out of the money.
The settlement price in this case can be determined in a number of ways. The two obvious solutions are that binary put options are treated as in-the-money or out-of-the-money and are settled at 100 or 0, respectively.
How to trade a Binary Put Option?
To trade a Binary Put Option, you need a reliable Binary Options broker. Using Pocket Option as your broker, let’s consider trading the asset gold, which is currently priced at $2182.546. With an expiry time of 5 minutes, you decide to invest $1000 in a Binary Put Option. The payout rate offered by the broker is 86%.
- If, within the next 5 minutes, the price of Gold falls below $2182.546, you will receive a payout of 86% on your investment, which equals to $860.
- However, if the price of Gold remains the same or increases during this time frame, you will lose the initial $1000 investment.
What are the differences between Binary Call Options vs. Binary Put Options?
Binary call options profit when the underlying asset price exceeds the strike price by expiration, whereas binary put options profit when the underlying asset price is below the strike price by expiration.
Aspect | Binary Call Options | Binary Put Options |
---|---|---|
Prediction | Trader predicts higher underlying asset price after a set time. | Trader predicts lower underlying asset price after a set time. |
Profit Opportunity | Profit when underlying asset price exceeds strike price by expiration. | Profit when underlying asset price is below strike price by expiration. |
Risk | Limited risk, potential for loss limited to option premium. | Limited risk, potential for loss limited to option premium. |
Market Movement | Benefits from bullish market conditions. | Benefits from bearish market conditions. |