Binary Options are a variation on ordinary options, which means the buyer of the option have the right, but not the obligation, to fulfill a specific transaction in the future. The seller on the other hand has the obligation to fulfill the transaction agreed upon. Basically it is the same story as when you are buying a house. If you really want a house but you find it a tad expensive and you want to talk it over with your bank first, you will put down a certain amount of money to reserve the house. Then you can with peace and calm discuss with your wife and bank what to do next. If you don't want the house then you have lost the money you put down to reserve it. If you instead go ahead and purchase the house, even if it's worth more now, the seller cannot back out, but must sell at the price agreed upon when you reserved the house.
Now let's introduce the following option terms and put them in the context above:
Call Option
Put Option
Strike Price
In-The-Money
Out-Of-The-Money
At-The-Money
In the example above the the buyer bought a Call Option when he put the money down to reserve the house. A Call Option gives the buyer the right, but not the obligation, to buy a specified amount of an underlying asset at a specified price within a specified time. Sounds technical, but if you chew on it for a while you will understand that this was exactly what happened with the example above. A Put Option gives the buyer the right, but not the obligation, to sell a specified amount of an underlying asset at a specified price within a specified time. Now it starts to become a little more complicated, because most people would say that you cannot sell what you don't own. But in the world of options you can.
The Strike price is simply the price you have agreed to buy the house for. If during the time of the reservation period the price of the house goes up for some reason, for example you discover that Bruce Willis or some other famous person grew up there. Now the house has a much higher valuation. The seller, due to the agreement, still have to sell at the agreed price. You just had your Call Option expire In-The-Money since you would make a handsome profit if you sold it (in reality the option expires anyway). On the other hand, if you after you have bought the house finds out that the owner didn't build according to code and you have to upgrade it at the tune of $50,000. The Call Option now expired Out-Of-The-Money and you lost $50,000. If absolutely nothing happens and the price you paid was the correct evaluation, then the Call Option expired At-The-Money.
As you might have understood, it's a little difficult to explain Options with the use of ordinary dealings. But I think you got the gist of it. Now the difference between an ordinary option and a Binary Option is the fixed pay out of Binary Options. There are only two outcomes of a Binary Option, either you win or lose. There are no degrees of winning or losing as with ordinary options. With Binary Options you will always know your risk and reward and this is an tremendous advantage.
Binary Options are an interesting trading vehicle. It's suitable for novices and seasoned traders alike. Go with Binary Options it's the best choice.
