Through a broker, who deals in binary option, he buys a ‘cash or nothing’ binary call option of RIL with fixed a binary payoff of Rs 500. if an option expires ‘in the money’ then option holder will get amount equivalent to the market value of an underlying on which particular trade was entered on, if ‘out of the money’ then zero value.Ī trader thinks the Reliance Industries stock will touch Rs 950 in a month’s time. Or asset or nothing binary options where trade is done asset value i.e. if an option expires ‘in the money’ then option holder will get fixed cash amount on which particular trade was entered on, if ‘out of the money’ then zero cash. These are important elements to any binary option:īinary options are normally found in two formats,Įither cash or nothing binary options where trade is done on fixed amount i.e. If trader sees bullish trend then binary call option if bearish then binary put option. Binary option holder just bets on a proposition whether certain security price will rise or fall in future date basis that he/she buys/sells certain kind of option either call/put. An option automatically exercises or expires on the said date and it can’t be carried out on next expiry date, and the option holder can’t buy or sell the actual security.
These options have a fixed payout for a trader, which has a maximum time limit considering the difference between the purchase date and exercise date of an option. This works on the same lines like European style option. ‘strike price’ is more than the price of underlying asset on expiry date (date of consideration) then trader gets nothing out of that trade.īinary options are also called as digital options, all or nothing options, one touch options, fixed return options and bet options.ĭESCRIPTION: Binary options underlying base is compulsorily cash only settlement on the date of expiry of an option. price of an underlying asset on any given future date closes more than the ‘strike price’ of an option of that particular underlying asset on that particular date. In binary option for a trader a bet works if an option expires ‘in the money’ i.e. Similarly in binary option a trader has to bet on any one out of two options ‘buy/sell’ basis two definite outcomes whether an underlying asset price will rise or fall in the near future, for which a trader will earn fixed amount if bet worked in his favor. Dictionary meaning of ‘binary’ suggests where a moment involves two or composed of two, in simple terms it can be expressed as true/false, yes/no or 0, 1 i.e. DEFINITION: A binary option is a type of derivative option where a trader makes a bet on the price movement of an underlying asset in near future for a fixed amount.
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