A binary option that can be qualified as a «digital option or a fixed-return option constitutes a revolutionary and innovative tool in the world of trading. Binary options were created in July 2008 at the Chicago Board Options Exchange (CBOE) which is the principal financial center dedicated to options in North America.
Before this time, binary options were reserved for trading professionals such as banks and large financial institutions, and not available to the general public. Now trading in binary options has become popular and is catching on around the world.
Digital options were listed in the S&P 500 index but did not cover currency, stocks and all the financial products on the market. Recently, binary options have gained considerable importance. There are as many brokers in binary options proposing secure financial portfolios for trading professionals as there are for the greater public.
What is a binary option? A binary option is one in which the result is predetermined at the outset of a transaction.
A binary option is a contract created between a buyer and a seller: the investor simply has to correctly chose the direction that the underlying instrument will take (either an increase or a decrease in price.)
It is not necessary to have an in-depth knowledge of trading to dabble in binary options, the various brokers provide detailed explanations as well as advice for beginners and seasoned investors alike. However, it is strongly recommended to keep abreast of financial news (increases or decreases in stocks, gold prices, metals…)
Binary options are a very easy-to-use trading instrument in the financial markets. It is a method to realize profit over the short-term and transacting in binary options does not generally require payment of commissions or hidden fees.
Differing from a stock, a binary option is the right to buy (what is known as a «call») and to sell («put».) The price of the transation is set in advance. You benefit from a set profit in relation to certain criteria once the option expires.
Example : You speculate that Vodafone stock would reach a high of 100 € in one hour from now. If your prediction comes true, you would earn up to 85% of your initial investment.
On the other hand, if the Vodafone stock price was to decrease in an hour’s time, you would retain 15% of your intitial investment.
Two important terms to understand:
Fixed return: Binary options have a fixed yield which is established by the broker at the outset of the transaction. The amount of the potential gain or los is known in advance.
Asset : An asset is a stock, index or raw materials upon which contracts are placed (example: the euro and the dollar are assets within an option.)
Binary options are available on a variety of underlying assets: stock, raw materials, currencies and indexes.
If the investor executes a « call » or a « put », and at expiry the option has taken the direction conforming to the provision, the option will be « in the money.» If the option has not taken the right direction, it will be « out of the money. »