When participating in any type of investment activity, it is important to have a good understanding of various associated terms and phrases. Similar to any entity – whether physical or intangible – having a good foundation helps in ensuring that everything else remains strong.
In the trading of binary options, the market tends to move fast. Traders must monitor their positions so that they know if they are in- or out-of-the-money and are thus in a profit or loss zone. In this case, knowing the terms that are affiliated with trading and transactions is essential.
Before starting to trade in the binary options area, the difference between these instruments and regular options should first be noted:
Options – Options are considered to be financial derivatives that represent a contract that is sold by one entity, or the option writer, to another entity, or the option holder. The contract will offer the purchaser the right – but not the obligation – to either buy (call) or to sell (put) an underlying security or other type of financial asset at an agreed-upon price within a specific time frame or on a set date. With this type of option, the investor could gain or lose an indefinite sum.
Binary Options - Binary options differ from regular options in that their payoff is either set at a fixed amount of an underlying asset if the option expires in-the-money, or at nothing at all should the option expire out-of-the-money. These options may also be referred to as digital options.
Some of the other most important terms as they relate to binary options trading include:
At-the-Money – An option will expire at-the-money if the price of the underlying asset is the same at the options expiry time as it was at the time of the option’s purchase.
Call – When investors buy a call option, they are presuming that the price of the underlying asset will be higher at the option expiry date than it was at the time of the option’s purchase.
Expiry Time – The expiry time represents the date and time that the option will expire.
Prof. Binary’s Trading Tip:
You should also take a look at our trading example where we show you how to trade with binary options. Once you’re familiar with the terms you won’t have problems to understand how binary options actually work.
Index / Indices – An index represents a group of stocks or securities such as the Dow Jones Industrial Average (DJIA) and the NSADAQ.
In-the-Money – When an option is in-the-money, the trader will finish the option’s time period in a profitable position.
Out-of-the-Money – When an option is out-of-the-money, the trader finishes the option’s time period in an unprofitable position.
Put – When a trader holds a put option, he or she presumes that the value of the underlying asset will be lower at the time of the options expiry than it was at the time of the option’s purchase.
Strike Price – An option’s strike price represents the price of an asset at the time of sale. This is used in determining whether the option contract will expire either in-the-money or out-of-the-money.
Underlying Asset – Underlying assets can represent a number of different entities, including individual stocks, indices, currencies, and commodities such as gold or crude oil.
