This article will assist you to make the best of your binary options trading experience by explaining the most common and basic terms used in the binary options world. Once you fully understand the meaning of these terms you’ll be able to trade easily and with greater confidence and hopefully, make good returns. Educating yourself about the instruments you’re about to trade and becoming familiar with the basic terminology used in binary options, is the first step in becoming a successful binary options trader.
Without further ado, and in no particular order, these are the most common terms used in binary options:
A binary Call option refers to the binary options chosen if you believe that the price of the underlying asset will increase by the time of your chosen expiration.
A binary Put option refers to the binary options chosen if you believe that the price of the underlying asset will decrease by the time of your chosen expiration.
An underlying asset refers to the type of financial instrument you’re trading on. The price of the binary options is directly correlated to the price of the underlying asset. In Binary options you can trade four main types of assets: Currencies, Stocks, Indices, and Commodities. Examples of binary options assets include EUR/USD, USD/JPY, Apple, Google, S&P500, DAX, Gold, Oil and much more.
The payout is the amount of money you earn from a winning trade, which also means that your binary options trade is in the money. The binary options payout varies from broker to broker but usually, ranges from 60% up to 90%.
The strike price is the price of the underlying asset at the exact moment you purchase either a call or a put option. Basically, the strike price is your benchmark that determines if your binary option trade is either in the money (winning trade) or out of the money (losing trade).
The expiration time is the countdown to the date and time when the value of the asset is compared to the strike price to determine the payout. The expiration time is one of the key elements of binary options. The expiry time is a major factor in a binary option trade, as the forecast of an asset needs to be correct at the time of the option expiry in order for the option to expire in the money.
In the Money
In the money is a term that refers to a binary option trade that makes you a profit. A Put option is in the money when the strike price of the Put option is above the current price of the underlying asset. A Call option is in the money when the strike price of the Call option is below the current price of the underlying asset.
Out of the Money
Out of the money is a term that refers to a binary option trade that is a losing trade. A Put option is out of the money when the strike price of the Put option is below the current price of the underlying asset. A Call option is out of the money when the strike price of the Call option is above the current price of the underlying asset.
At the Money
At the money is a term used when the price of the underlying asset is similar at the expiration time to the price that it was trading at the strike price. In this case, the trade is considered at breakeven and your initial investment is returned in full by your binary options broker.