Binary option: Difference between revisions

Revision as of 06:58, 19 January 2025

Revision as of 07:00, 19 January 2025

Line 12:

Binary options "are based on a simple 'yes' or 'no' proposition: Will an underlying asset be above a certain price at a certain time?"<ref name="investopedia-guide">{{cite web |last1=Mitchell |first1=Cory |title=A Guide To Trading Binary Options In The U.S. |url=https://www.investopedia.com/articles/active-trading/061114/guide-trading-binary-options-us.asp |website=Investopedia |access-date=4 May 2018 |date=11 June 2014}}</ref> Traders place wagers as to whether that will or will not happen. If a customer believes the price of an underlying asset will be above a certain price at a set time, the trader buys the binary option, but if he or she believes it will be below that price, they sell the option. In the U.S. exchanges, the price of a binary is always under $100.<ref name="investopedia-guide"/>

[[Investopedia]] described the binary options trading process in the U.S. thus:

<blockquote>[A] binary may be trading at $42.50 (bid) and $44.50 (offer) at 1 p.m. If you buy the binary option right then you will pay $44.50, if you decide to sell right then you'll sell at $42.50.

Let's assume you decide to buy at $44.50. If at 1:30 p.m. the price of gold is above $1,250, your option expires and it becomes worth $100. You make a profit of $100 – $44.50 = $55.50 (less fees). This is called being "in the money".

But if the price of gold is below $1,250 at 1:30 p.m., the option expires at $0. Therefore you lose the $44.50 invested. This is called being "out of the money".

The bid and offer fluctuate until the option expires. You can close your position at any time before expiry to lock in a profit or a reduce a loss (compared to letting it expire out of the money).<ref name="investopedia-guide"/></blockquote>

In the U.S., every binary option settles at $100 or $0, $100 if the bet is correct, 0 if it is not.<ref name="investopedia-guide"/>