Common Terms in Binary Options

When interacting or trading binary options, you will most certainly come across the following terms.

Asset

The underlying instrument used to determine a contract; generally a commodity, stock, currency pair, or index.

At-the-Money

A term used to describe a neutral loss and gain as a result of the asset value at expiry being roughly what it was at purchase.

Call Option

One of two option choices, in which the investor realizes a profit if the asset has a higher value at expiry than it did at purchase.
Current Price
The price in near real time as reported. The term current price is often used to contrast real-time reporting from most free price information, which is often delayed by fifteen minutes or more.

Digital Options

An alternate name for binary options; a type of option with a fixed payout and fixed loss.

Expiry Price

The current price of the asset when the contract on the asset expires. In above-below binary trading, whether the option finished in-the-money or out-of-the-money is based on the expiry price of the asset.

Expiry Time

The date and time when the option expires.

Exotic Options

Binary Options are a simplified version of exotic options, which were traded on exclusive markets by brokers for years before they were available to the public as binary options.

Fundamental Analysis

One of the two major schools of analysis, used to examine macroeconomic data such as national economic health, central bank decisions, political events, or geologic events. At its core fundamental analysis believes that assets may be mispriced temporarily, but eventually will reach their correct price, and by examining macroeconomic events one can deduce what that eventual correct price will be.

Investment Amount

The amount of money invested in either a Put or Call option; the stake.

In-the-Money

A term to describe an investor finishing in a position where they realize a profit. If a Call option was purchased, it is in-the-money if the expiry price is higher than the current price was at the time of purchase; if a Put option was purchased, it is in-the-money if the expiry price is lower than the current price was at the time of purchase.

Over Option

This is a position taken by a trader if he has reasons to believe that the market is rising. He will get the payout when at the expiry time the price of the underlying instrument has gone above the strike price.

Over-the-Counter (OTC)

Products which are sold directly between two parties; distinguished from exchange trading, which occurs via exchanges and brokers set up for the purpose of managing these transactions. Binary options are available in a limited number of exchanges, but are primarily sold as over-the-counter products online.

Out-of-the-Money

A term used to describe an investor finishing in a position where they experience a loss. In binary options this generally results in a loss of 80% to 100% of the initial investment. If a Call option was purchased, it is out-of-the-money if the expiry price is lower than the current price was at the time of purchase; if a Put option was purchased, it is out-of-the-money if the expiry price is higher than the current price was at the time of purchase.

Payout

The profit realized when a contract expires in-the-money. In binary options the payout is generally between 75% and 81%.

Strike Price

May be used in a number of contexts. Generally speaking, the price at which the contract option for an asset can be exercised. In the case of binary options, most often refers to the price-at-sale of the asset, which is also the price used to determine whether a contract expires in-the-money or out-of-the-money in an above-below option. In the case of a touch option, refers to the value the asset must reach for the contract to be in-the-money.

Time of Expiration

The time and date an option contract expires; expiry time.

Technical Analysis

One of the two major schools of analysis, used to examine historical data to predict future trends in an asset price. At its core technical analysis believes that all aspects of an asset price are built into the market price, and that trends can be deduced to determine the direction an asset will take.

 Under Option

This is a position a trader assumes if he predicts that the asset price is on a downward spiral. The trader gets the reward if the price of the asset in questions falls below the strike price.

Touch Options

In these binary options, the trader predicts a certain level that the price movement will reach or not reach. This level can either be lower or higher than the current price of the financial instrument. There are three main types of touch options; No Touch, One Touch and Double Touch.

No Touch

This option pays the trader when the predicted level is not reached.

One Touch

In this binary option, the traders predefine a certain price level that they are sure the asset price will reach regardless of the sustainability of this price level.