A binary option is an option that pays either a fixed amount or nothing, depending on whether a certain condition is fulfilled when the option expires. These types of options are different from plain vanilla options. Binary options are also referred to as all-or-nothing options or “digital options”since it is a type of option where the payoff is all or nothing.
Binary Options trading is considered as one of the fastest growing simplified trading products.
Binaries are considered as a mass market financial product as it empowers traders with a flexible trading method without the complexities involved in trading traditional vanilla options.
There are two types of binary options, binary call options and binary put options. Binary call options gain value when the underlying security is trading at more than the strike price at expiration.
There is no need to set a specific target, it is only important to identify that the underlying asset will increase in price. If the price of the underlying security goes up and exceeds the strike price of the binary options at expiration, the predetermined amount will be paid out.
An option is “In the money” when it gains value upon expiration. In a similar vein, binary options are “Out of the money” when they lose value upon expiration. Binary options can also be “at the money”, when the strike price of the option equals the market price of the underlying security. In this instance, the option neither gains nor loses value and the payout equals the original amount traded.
What is an embedded option?