Binary options democom
Prior to this time, binary or digital options were traded actively in the over the counter market by institutional investors and major investment banks. So what are Binary Options? This can mean that there is a specific cash payout, or even a specific amount of an underlying asset that is the payout from the option. Today there are many brokers and market makers who provide a safe and effective binary option platform for the retail investor and the professional traders.
What makes binary options interesting is that the investor receives a fixed payout as a return based on whether the financial market is above or below a specific level at a specific time.
As opposed to a standard option, the option buyer can look for a specific payout based on a small move in a financial instrument. When trading standard options, the market has to usually move a great deal for there to be a payout. The structure set up for binary options creates a significant payout, with relatively small moves in the underlying market. This market is relatively easy to understand, and once an investor trades binary instruments, they will quickly understand the benefits relative to other options markets.
This binary Forex option is called a call above binary option. There are also binary options that allow an investor to trade speculate on a specified range over a period of time. Additionally, a trader could hedge the Vega, which is another Greek to mitigate any slippage associated with the time decay related to the option again, this is covered in the option Greek article.
In the world of binary options, especially for a weekly or monthly options but occasionally a daily option , the market will move in favor of the investor by an amount in which the investor would like to monetize the option take profit on the option.
If an investor took a position in a binary option Gold Call when the market was at with an expiration date at the end of the week when we are at the beginning of the week , and the underlying markets moved to , the investor would need to wait until the end of the week normally to monetize the option and receive a payoff.
One way to monetize would be to use standard methods, which would be to delta hedge the underlying gold risk, or to sell an option structure that was similar to the binary call option.
A structure that has a very similar is a call spread. A call spread is where a trader buys a call option with a lower strike, and simultaneously sells a call with the same expiration date with a higher call strike or sell a lower call strike and buys a higher call strike.
To hedge a binary option in the example above gold were the trader purchased a binary call and the market moved to an investor could sell a call and simultaneously purchase a call option. This trade would lock in the premium from selling an in the money call and purchasing a at the money call. If the Gold market continued higher, the gains in the binary option would offset any losses received by selling an in the money call spread.
If the gold market reversed, the premium received from selling and in the money call spread would offset the premium paid for the binary call option. Selling a call spread when a binary call option is in the money could be as beneficial as selling the binary option back to the broker. A trader would need to compare the net premium paid buying the binary option and the premium paid for taking profit to the underlying payout of the binary option and determine if that net gain was better than the potential gain from selling a call option structure to monetize the binary call option.