There are many different types of binary options, including up and down, no touch, one touch, range, ladder, and higher/lower. In this article, we explore these six common types of binary options, explaining what sets them apart in simple terms and providing clear examples to illustrate how they work.
Most Important Facts About Binary Option Types:
- The “Up and Down” binary option, where traders predict whether an asset’s price will go higher or lower than the current price at a specified time, is the most popular and widely used due to its simplicity and suitability for beginners.
- “No Touch” binary options are designed for market conditions with lower volatility, allowing traders to profit if the underlying asset’s price does not reach a specified level before the option expires.
- “One Touch” binary options, requiring the asset’s price to touch a predetermined level at least once before expiration, are preferred in volatile market conditions with anticipated significant price movements.
- Traders use “Range” binary options to predict whether an asset’s price will stay within a specified range by the time of expiry, making it suitable for stable or consolidation market conditions.
- “Ladder” binary options, with multiple price levels and varied risks and rewards, are more complex and suitable for advanced traders. Profits can be secured even if not all conditions are met, making them distinct from other binary options types.
Types of Binary Options (With Examples from Different Markets)
What you will read in this Post
1. “Up and Down” Binary Options
First, this type of binary option is the most popular and widely used. In this setup, you predict if the price of an underlying asset will be higher (go up) or lower (go down) than its current price at a predetermined time. Hence, the name “Up and Down.”
This binary option type is popular because of its straightforward nature with a simple prediction requirement: up or down. It’s popular among beginners because of its simplicity.
Example: Suppose you are looking at the EUR/USD currency pair currently at 1.1500. If you believe the pair will be above (Up) 1.1500 at the end of the day, you will enter a “Call” option. On the other hand, if you believe it will be below (Down) 1.1500, you would then enter a “Put” option. The outcome will be determined at the option’s expiry time, in this case, the end of the day.
2 . “No Touch” Binary Options
Second, in a “No Touch” option, you believe that the underlying asset’s price will not reach (or “touch”) a certain price level or barrier before the option expires. With its nature, this option type best suits market conditions with relatively lower volatility (or sudden price spikes in one direction).
Example: Suppose you are looking at a stock currently trading at $95. You may choose a No Touch option with a price barrier of $100 if you believe the stock will not reach this price level before the option expires. Thus, if the stock stays below $100 until expiry, then you win. On the contrary, you lose your entire invested position.
3. “One Touch” Binary Options
Third, in contrast with “No Touch,” this option type requires the underlying asset’s price to exceed or “touch” a predetermined target level at least once before the option expires. Hence, this type is popular and preferred in volatile market conditions where wild (significant) price movements are expected.
Example: Suppose you expect that the price of gold, which trades at $2,000 per ounce, will touch $2,100 at some point in the next week; then, you could enter a One Touch option with a target of $2,100. You win if gold touches at least once 2,100 within your set timeframe. Otherwise, you lose your entire position.
4. “Range” Binary Options
Fourth, “Range” options involve predicting whether the price of an underlying asset will stay within a specified “price range” by the time of expiry. As you might expect, this type of option is preferred during “consolidation” or where price movement is expected to be stable or “range-bound” within a certain timeframe.
Example: Suppose you are looking at the S&P 500 index and observing it trading at a price range of 4,650 to 4,800. If you expect it to continue to trade at these levels for the next day, you can enter a range option similar to these levels expiring in one day. If the price never breached either 4,650 or 4,800, then you win. However, you lose your entire position if it breaches either of these levels at least once before your option expires.
5. “Ladder” Binary Options
Fifth, and perhaps one of the most complex types of binary options, is the “Ladder” option. This type of option provides several price levels (rungs), each with its own risk and payout (reward). You will then have to predict whether the price will breach these levels before expiration. Because of its more complex nature, this option type is more suitable for advanced traders with sufficient trading experience in other binary options types.
Example: Suppose you are looking at a stock trading at $100; a ladder option might have price levels (rungs) at $101, $103, and $105. You will then have to predict that the stock price will exceed each price level within a specific timeframe. With each successful prediction, your payout rate increases.
If, for example, you breached $101 and $103 but not $105 within the given specific timeframe before expiration, you will not lose your entire position and still secure the profits you accumulated in the first two rungs.
One of the primary attractive attributes of a ladder option versus other option types is the ability to secure profits despite technically not “meeting” all contract conditions. Nevertheless, its relatively more intricate nature requires more proficiency than other binary options.
6. “Higher/Lower” Binary Options
Lastly, “Higher/Lower” binary options are similar in terms of concept to “Up and Down.” The key difference between the two lies in execution. In Up and Down, you don’t choose a specific price level. Instead, you just bet on the direction (up or down) from its current price level. On the contrary, in Higher/Lower, you are given a specific price level (set by the broker) that is different from the current price. Based on this, you then bet whether the asset’s price will be “higher” or “lower” than this set level at the option’s expiration.
Example: In an Up and Down, if a stock is currently at $100, you need to predict whether it will be above or below $100 when the option expires. Meanwhile, for Higher/Lower, if a stock is currently at $100, and the broker sets the level at $105, you must bet whether the stock will be higher or lower than $105 when the option expires, irrespective of its $100 current price.
What is the Best Binary Options Type?
Well, it depends. There is no inherently one “superior” type among the six. Instead, choosing the best type depends on your risk tolerance, level of options, market knowledge, preferred strategy, and trading experience.
Beginners might find Up and Down and Higher/Lower options more straightforward to learn and execute. Advanced traders may prefer the potential higher returns despite the complexity of Ladder options.
Cheat Sheet to Determine What Binary Options Fit You
Now that you clearly understand each type, here is your cheat sheet with potential earnings (broker consensus), pros and cons, and what we think is an ideal trading style to match each of the types we covered.
Types | Potential Upside | Pros | Cons | Suited for Whom |
Up and Down | Up to 85% | Simplicity and high liquidity | Relatively higher risk of total loss | Beginners to Experienced Momentum Traders |
No Touch | Up to 75% | Relatively less risky compared to other types | Not ideal in volatile market conditions | Relatively Risk-Averse Traders/ Support and Resistance Specialists |
One Touch | Up to 90% | High upside potential | Not ideal in sloppy (low volume) market conditions | Experienced to Advanced Momentum Traders |
Range | Up to 80% | Ideal in stable market conditions | Not ideal in volatile market conditions | Support and Resistance Specialists |
Ladder | Up to 100% | High upside potential,Flexible for advanced traders | More complex | Advanced Traders / Scalping Specialists |
Higher/Lower | Up to 85% | Simple and straightforward | Relatively higher risk of total loss | Beginners to Experienced Momentum Traders |
Conclusion and Caveat
At the end of the day, no matter how simple these may look, binary options trading is still one of the riskiest financial instruments you can trade because its very nature is a zero-sum game: you win big when you are correct or lose your entire risked bet when you are wrong. Doing your due diligence is crucial in becoming consistently profitable in trading any of these binary options trading styles.
Most Asked Questions:
What is the most popular and widely used type of binary option?
The “Up and Down” binary option is the most popular. Traders predict whether the price of an underlying asset will go higher or lower than its current price at a predetermined time, making it straightforward and suitable for beginners.
How does the “No Touch” binary option work, and when is it best used?
In a “No Touch” option, traders bet the underlying asset’s price will not reach a specified level before expiration. This type is ideal in market conditions with lower volatility, where sudden price spikes are less likely.
What is the key requirement for a “One Touch” binary option, and when is it preferred?
The “One Touch” option requires the underlying asset’s price to touch a predetermined level at least once before expiration. It is preferred in volatile market conditions with significant price movements.
How do “Range” binary options function, and when should they be used?
“Range” options involve predicting whether the price will stay within a specified range by the time of expiry. They are suitable for stable market conditions or consolidation where price movement is expected to be range-bound.
What makes “Ladder” binary options unique, and who are they suitable for?
“Ladder” options involve multiple price levels with varied risks and rewards. They are suitable for advanced traders with experience in binary options. Profits can be secured even if not all conditions are met.
Is there a superior binary options type, and how should one choose?
There is no inherently superior type. The choice depends on individual preferences, risk tolerance, market knowledge, and trading experience. Beginners may find simplicity in “Up and Down,” while advanced traders might prefer the complexity of “Ladder” options.
What trading style is suitable for each binary option type?
Trading styles vary based on risk tolerance and complexity. “Up and Down” suits beginners to experienced momentum traders, while “Ladder” options are for advanced traders. “Range” options are suitable for support and resistance specialists.