In the world of finance, a type of trading instrument is a binary option. The payoff for a binary option is one of two things; a fixed amount of the chosen asset or zero. There are two types of binary options and include the cash or nothing option and the asset or nothing option.
Every binary option is based on three elements and includes the binary option contract, underlying asset, the and the forecast or prediction.
Most binary option platforms offer binary options on a variety of underlying assets. They include commodities, indices, currencies pairs and stocks. Traders decide to specialize in one particular underlying asset or area of the trading market.
The contract for the binary option can last anywhere from one hour to a 30 days, however, there are some trading platforms that do offer contracts for as little as 5 minutes. It is always important to know how much time is left until the contract expires before the option expires.
The goal of the investor or trader is to predict the direction the under lying asset of choice will go before the contract time expires. Traders who predict the asset price will increase should buy a Call option and traders who believe the asset price will decrease should buy a Put option. Predicting the correct direction the asset will move will bring the trader profits that are very high and can sometimes double the trader’s investment. If the trader does not predict the correct direction, the trader will lose their investment.
There is a close now ability which gives the trader the ability to cancel an option before the contract time expires. A trader may decide to take this course of action if the option does not perform as expected because the underlying asset chosen is not moving in the direction predicted. For example, if a trader bought a 60 minute Call option and after 52 minutes the price of the underlying asset begins to fall after being in a positive, upward swing, the trader could choose the Close Now option to ensure a profit is made. Another scenario is if the option has decreased steadily, the trader could use the Close Now option to minimize a loss.
Some trading platforms include a feature called Roll Over. That allows the trader to extend the time of the contract to expire in the money and turn a profit. This is helpful if the asset is moving in the desired direction slower than anticipated.