Binary options differ from traditional options of trading due to their design that involves only two outcomes under consideration. They are therefore one of the most preferred ways of trading the fluctuations in prices in multiple markets.
The “high-low” or fixed-return option is the most popular Binary option. This option provides access to foreign exchange, commodities, indices and stocks. The success of an option holder is based on whether they have waged correctly on the direction of the market and not the degree of movement of the asset. An exercise (strike) price and an expiry time or date are preset to determine this. A wage is paid out if at the expiry of the trade the price of the underlying item is at the foreseen side of the exercise price. If you choose an ‘out of the money’ option you win nothing, hence the term “all-or-nothing” option.
A binary option is a common type of Binary option with a call/put or up/down option. As a trader, you buy a call (up) if you predict that the underlying price will go up. But if you believe the contrary, then you buy a put (down). The expiry, exercise price, risks and payout are all revealed before the trade begins. To be compensated for a call, the price you predicted must fall over the exercise price when the time expires. If you bought a put and indeed the market falls, you are only compensated if the price is below the exercise price at expiry.
Typically, binary options traded on U.S exchanges differ from those outside the U.S in their structure. The exercise price for many high-low binary options in foreign countries is the specific stock, USD/EUR currency pair, or the S&P 500 index. The wager, therefore, is about what the bargain price at expiry will be (lower or higher) when compared to the price at the beginning.
Another difference that foreign digital options have with digital options in the US is that they are not offered by an exchange. Instead, there are brokers who capitalize on the difference created when an investor loses and when they win a wager.