Types of Binary Options
While there are several different types of binary options, the most popular form of binary option is above / below options. As the name of the instrument implies, there are two possible outcomes when you trade above / below binary options–win or lose.
When trading above / below options winning or losing depends on if you can accurately predict if the price of an underlying asset will increase (above) or decrease (below) by the time of expiration. If the trader believes that the price of the underlying asset will be above the current price by the time expiration, they will take out a Call option. On the other hand, if they believe that the price of the underlying asset will go below the current price by the time of expiration, they will take out a Put option. The option will be in-the-money and the trader will receive a high return between 75% – 85% on their initial investment if they predict the direction of the option correctly.
There a few important differences between traditional options and above / below options. With traditional options, the intrinsic value of a Call or Put increases as the price of the underlying asset goes deeper in-the-money. However, with binary options, the degree to which the underlying asset’s price is in-the-money does not affect the payout. Unlike traditional options, binary options cannot be sold or exercised before they expire. While owners of traditional option contracts can take delivery of underlying assets like stock shares and commodities, binary option traders never actually buy the underlying asset, but simply buy an option on which direction it will move.
There are three majors types of binary options, Above / Below, Touch and Range. Traders can achieve great flexibility with their trading by exploiting the unique characteristics of each type :