Binary Options are straightforward, limited risk
derivatives. Based on a simple yes/no proposition, they offer an intuitive way
to trade the financial markets with relatively low collateral.
Broker offers Binary Option trading on these markets:
• Stock
indices
• Forex
• Commodities
• Events
Binary Option prices are based on the value of underlying
financial futures and spot forex rates.
How
Do Binary Options Work?
A Binary Option asks a simple yes/no question.
Will the price of gold be above $1625 at 1:30pm?
If you think yes, you buy the option. If you think no,
you sell the option.
The price at which you buy/sell is not the actual price
of gold, but rather a value between zero and 100.
For example, Gold > 1625 (1:30PM) may be priced at
42.50/48.50. The first figure is the bid price (sell), the second is the offer
price (buy).
The bid/offer price fluctuates throughout the day, but
always settles at either100 (if the answer is yes) or zero (if the answer is
no). Your profit/loss is calculated using the difference between the settlement
price (zero or 100) and your opening price (the price you bought or sold at).
Benefits
of Trading Binary Options
Binary Options are designed to provide an exciting trading
experience, even in flat market conditions.
• Trade
with strictly limited risk
• Low
collateral required to trade
• Opportunities
in volatile and flat markets
• Multiple
daily trading opportunities
Binary
Options Contracts
Expiration
Times
When brokers list Binary Options on a market, brokers
provide multiple opportunities to trade with different expiration times. These
can be split into four categories:
• Intraday
– at times within the current trading day
• Daily –
at times within 24 hours of listing
• Weekly –
at the end of the current trading week
• Event-based
– at a specified future time and date
Expiration
Value
When a contract expires, brokers obtain an expiration
value based on the specified underlying market, using the following process:
1. Take the
last 25 trade or midpoint* prices in the underlying market
2. Remove
the highest five prices and the lowest five prices
3. Take the
arithmetic average of the remaining 15 prices and round to one decimal point
past the point of precision of the underlying market (with the exception of
Wall Street 30, which is rounded to the same point as the underlying market)
The market prices brokers use to calculate the expiration
values are obtained through a data feed from Reuters. If Reuters is
unavailable, we may obtain market pricing data through Bloomberg or another
data provider that brokers deem appropriate under the circumstances.
For contracts on Economic Events, the expiration value is
the figure released by the designated reporting body.
Settlement
Binary Options are cash-settled contracts that settle
with an all-or-nothing payout if left to expiration.
• If the
condition of the contract is achieved, the settlement value is 100
• If the
condition is not achieved, the settlement value is 0
• It is possible
to close a contract prior to expiration, either to take profits or cut losses.
Strike
Prices
The strike price of a Binary Option is the level of the
underlying market against which the option is settled. In a 'Gold >$950 at
1:30PM' contract, for example, the strike price is $950.
Brokers list a range of strike prices for each expiration
time. For example, Broker a lists 23 different strike prices for each daily
gold expiration – staggered at intervals of $3.
Risk Warning: Trading binary options carries a high level
of risk to your capital and may not be suitable for all investors. You may lose
more than your initial investment! Ensure you fully understand the risks
involved and seek independent advice if necessary.
