Binary options are contracts that represent bets on one of two pre-agreed events with the broker, limited in a certain time frame.
Events are usually associated with the forecast of the price of an exchange - traded asset, which is called the base price. Since binary options are not a standardized contract, the types of conditions, the list of exchange-traded instruments, the types and their names may differ from one broker to another. The time period of the transaction is called expiration, the client independently chooses its duration, based on the step of the minimum and maximum restrictions.
The value of an option is defined as a bet on one of the outcomes chosen by the trader, such as 0 or 1 (even/odd, red/black, etc.), which explains the name" binary " in the contract. The price of the underlying asset does not affect the size of the bid, which is selected in the same way as the expiration-limited to the minimum and maximum values and increments.
In the event of a positive outcome at the time of the expiration of the contract, the broker pays the client a pre-agreed premium, determined as a percentage of the amount deposited, or, as they say, invested in the option.
Types of binary options
Despite the fact that each broker has the right to set its own classification of binary options, the total trip separates these tools types at the time of expiration and, in terms of performance.
It is customary to allocate short-term, medium-term and long-term options, the first are called "turbo" and are limited to a period of five or fifteen minutes.
Regardless of the type, the contracts are divided into American and European binary options. As in trading, the "American" type is understood as the possibility of early closing or increasing a position, extending the expiration time, etc. Basically, brokers practice the European type of transactions, where the conditions initially accepted are not subject to change before the expiration of the option.
Types of binary options
The most common type of binary contracts is Above/Below, which is sometimes called Call/Put. The meaning of the transaction is to predict the position of the price of the underlying asset at the time of expiration.
By choosing a direction, for example, an increase (Call), the trader receives a pre-agreed percentage of the invested funds, if the price position at the end of the contract period is above the entry level. Assuming the future decline of the underlying asset, the premium can be obtained at expiration in the event that the quotes remain below the price level of the beginning of the transaction. The figure below shows a typical web trading terminal, with an open option Above/Below, of the American type.
Since the forecast was made by the close below 1.20728 if at the end of 15 minutes at least one point will be lower than this value, the trader will receive:
debited for the transaction from the account the amount of the investment (in this case, $10);
additionally, 80.9% of the premium ($8.09).
This is the only type of binary options whose terms are treated equally by all brokers. The second most popular type of contract is "Touch/No touch."
The broker sets one or two price levels from the point of conclusion of the contract. The trader needs to choose the touch option or its absence during the option's validity period.
The position of the price at the time of expiration affects the result. Moreover, by placing a bet on the "touch", the trader will receive a premium ahead of time, as soon as the quotes touch one of the two or one level (depending on the broker's conditions).
If you select the "No Touch" condition, you will have to wait for the outcome of the transaction until the end of the expiration, if this is a European option. In the American version, the bidder has the right to close the position ahead of time or, conversely, to extend the transaction time.
The "No Touch" option for some brokers is similar to the "Within Range"option contracts. The opposite is considered to be the "Out of Range" option - premium interest is paid when the price is higher or lower than the selected price range at the time of expiration of the option.
The static nature of this option is determined in the trading terminal by only one "Buy" button, without an additional set of condition options, because the range size is chosen by the broker.
The amount of premium interest is also determined by the company trading binary options, and depends on the expiration date and the complexity of the conditions. For example, payouts on express options, where the profit is due to a chain of consecutive events, reach 1000%.
Buying and selling binary options
It is believed that the company trading binary options acts as a Seller, and the client-the Buyer of such contracts. In fact, this type of instrument, like any other, can be both bought and sold independently, if you choose the appropriate broker (a large investment bank) or work with the North American Nadex exchange.
This is an intermediary platform, which, like any exchange, does not trade, but guarantees transactions between sellers and buyers, having its own percentage for this. By choosing a standardized binary option on this platform, the trader can freely take any of the two positions.
Established in 2006 under the HedgeStreet brand, the exchange operates with an official license from the CFTC Commission to trade binary instruments.
Regulation and licensing in binary options
Despite the fact that binary options have been traded on the market for 10 years, the financial regulators of the countries have not developed a unified approach to licensing this type of activity. A company offering contracts without any certification or documentation is a common occurrence.
Large Forex brokers that have established a reputation in the foreign exchange market, almost 100% do not seek to license the activity of trading binary options. In a number of offshore jurisdictions, this type of business is equated to gambling, so you can see "gaming licenses"on the company's websites.
The most reliable licenses are recognized by the Commodity Futures Commission (CFTC) and SEC securities in the United States, in the European Union, the CySEC certificate issued specifically for options has the same "weight" (the regulator also issues a permit for Forex trading).
The Australian Securities Commission (ASIC) and the New Zealand FMA may also consider and grant permission to trade Above/Below contracts, as may the Malta Financial Services Authority.
Countries where binary options trading is legally prohibited: Israel, Belgium, France, Canada.