Don’t be intimidated! Its name may sound complicated, but binary options are arguably a simpler way to trade than traditional options or currencies.
Just like traditional options, binary options have a premium, a strike price, and an expiration.
The difference is that, with binary options, the “premium” amount for the option is chosen by the trader (usually determined by the market with traditional options) and the expiration timeframes are much shorter.
Traditional options have an expiration range of a week to a couple of years, while binary options have an expiration range of less than a minute to a few days.
These variations bring about the biggest difference, which is how a profitable trade is calculated. But before we cover the ka-ching ka-ching, let’s take a look at how binary option trades work.
With a binary option trade, the broker will pay out a percentage of the premium at risk if the conditions of the contract are met (e.g., the market price is at or beyond your target strike at expiration with a call option).
Basically, you receive a predetermined fixed profit, regardless of how far the market moves beyond the strike price or met the conditions of the contract.
Whether it’s by 1 pip or 1,000 pips, it’s the same profit payout at contract expiration; there is no middle ground. This is why binary options are also known as “all-or-nothing” options.