When Weekly Options started trading a few years ago, everyone though wow, those expire quickly. Now there is a new phenomenon called binary options that expire after 60 seconds or one day!
Here is a typical binary options trade. Not much different from a regular weekly or monthly option, just the time to expiration. The Binary Option show options traders how to trade binary options.
The trader thinks that the EUR/USD strike price will close at or above 1.3000 at 3:00 p.m. can buy a call option on that outcome.
The trader who thinks that the EUR/USD strike price will close at or below 1.3000 at 3:00 p.m. can buy a put option.
At 2:00 p.m. the EUR/USD spot price is 1.2999. the trader believes this will increase, so he buys 10 call options for EUR/USD at or above 1.3000 at 3:00 p.m. at a cost of say $40 each.
The risk involved in this trade is known. The trader’s gross profit/loss follows the ‘all or nothing’ principle. He can lose all the money he invested, which in this case is $40 x 10 = $400, or make a gross profit of $100 x 10 = $1000. If the EUR/USD strike price will close at or above 1.3000 at 3:00 p.m. the trader’s net profit will be the payoff at expiry minus the cost of the option: $1000 – $400 = $600.
The trader can also choose to liquidate (buy or sell to close) his position prior to expiration, at which point the option value is not guaranteed to be $100. The larger the gap between the spot price and the strike price, the value of the option decreases, as the option is less likely to expire in the money.
In this example, at 3:00 p.m. the spot has risen to 1.3005. The option has expired in the money and the gross payoff is $1000. The trader’s net profit is $600.
Visit the Binary Option Exchange to learn more about Binary option trading.