What Are Binary Options?

Binary options are a new category of financial investment that allow much more flexibility in option pricing, expiration etc. With Binary Options traders can buy contracts that predict trade outcomes and the trader is paid back his initial investment plus a profit if his prediction is correct and is paid nothing if he is wrong. Binary options are also known as fixed return options or digital options. Sometimes they are incorrectly referred to as spread bets, but the fact is that there is no place for betting in binary options. The trader is rewarded for proper analysis and correct trade calls.

There are several types of binary options.

However, all binary options have one thing in common irrespective of the trade type.

1)      There is a traded asset.

2)      The trades have expiry dates/times.

3)      The returns on the trade obey the “all or none” principle, with the trader being paid all if he wins, or none if he loses.

The types of binary options trades available to traders differ from broker to broker .

8 Types of Binary Options Trades

1)      Rise/Fall (High/Low) trade

2)      Touch/No Touch

3)      In/Out (Boundary)

4)      Classical Trade

5)      Option Builder

6)      High Yield Boundary

7)      High Yield Touch

8)      60 second trade

To have a better understanding of each trade type, let us analyze them one after the other.

Rise/Fall

This is also known as the High/Low or Up/Down binary. Here the trader is purchasing a binary options contract in order to predict if the traded asset price will rise above or fall below the chosen strike price by the time the trade expires.

Touch/No Touch

In this trade type, the trader chooses a price barrier and then purchases a binary options contract to predict whether the price of the asset will touch the price barrier or not, by the time the trade expires.

High Yield Touch

The high yield touch is a variation of the Touch trade where the broker arbitrarily sets a price barrier and the trader is expected to purchase a contract to predict whether the price of the asset will touch this barrier. The asset must touch the barrier for the trade to be a winner. The expiry is usually an intra-day expiry and the payouts are high for winning trades; up to 400%. The extremely short expiry and the near-impossible price targets make this very difficult to trade with success.

Classical Trade

This is simply a Touch/No Touch trade, but here the broker gives specific expiry times which the trader has to work with. The trader is not allowed to set just any expiry he wants.

Option Builder

Here the trader can customize the binary options contract. It is basically a Touch/No Touch or a Rise/Fall trade, but here the trader can set the expiry times not in days or minutes, but to a specific time in a 24-hour period.

High Yield Boundary

This is an “Out” trade variety where the trader is given a rigid expiry with wide price boundaries (upper and lower price boundaries usually far apart from each other). Again the payouts are quite large, but this is an extremely difficult trade to win because of the conditions attached to the trade.

60 Second Trade

This is a Rise/Fall trade with an extremely short expiry, restricted to 60 seconds. This is one of the few binary options trade types that can end at breakeven point, when the asset price ends at the same price level at which the contract was purchased.

According to Wikipedia- What is Binary Options:

The two main types of binary options are the cash-or-nothing binary option and the asset-or-nothing binary option. The cash-or-nothing binary option pays some fixed amount of cash if the option expires in-the-money while the asset-or-nothing pays the value of the underlying security. Thus, the options are binary in nature because there are only two possible outcomes.

Binary Option Availability

It is not possible to get all the trade types from one single broker. Not all brokers offer all types of Binary Options. You may have to open accounts with two different brokers to get access to all these binary options trade types.

About the Author:

This article was written by Adam Green, who has more then 10 years experience trading in the Forex, binary options and commodities markets.  He also runs a number of his own financial trading websites with trading strategies and analysis.