Binary Options: Strategies for Directional and Volatility Trading

CHAPTER 1

What Are Binary Options?

Binary options are also known as digital options or all-or-nothing options. They are derivative instruments that can be considered a yes-or-no proposition—either the event happens or it does not.

Binary options are considered binary because there are only two potential outcomes at expiration: 0 or 100; 0 and 100 refer to the settlement value of a binary option and could be viewed in dollars. At expiration, if you are incorrect, you do not make anything ($0), and if you are correct, you make up to $100. The next section will go into further detail on the settlement value of binary options.

ON WHAT ASSET CLASSES ARE BINARY OPTIONS AVAILABLE?

Binary options are available on four different asset classes. These include stock index futures, commodity futures, spot forex, and economic data releases. This section will explain the basics of what each of the asset classes are and how they work.

Before we explain the different futures asset classes, it is important to first understand what futures are. A future is a contract that says that the buyer or seller will purchase or sell a specific asset for a specific price at a specific time in the future. Investors trade futures contracts to speculate for profit and to hedge their assets. One of the benefits of trading futures is that traders don't have to physically buy a certain commodity in order to speculate on its price movements. They can simply enter their trade with a smaller amount of cash on margin. ...