Binary Options: Strategies for Directional and Volatility Trading

CHAPTER 2

What Does Binary Mean?

Binary options are considered binary because there are only two potential outcomes at expiration: 0 or 100. At expiration, the condition you are speculating on can be simply true or false. For example, if you are trading binary options on the Standard & Poor's (S&P) futures, the price of the underlying will either be trading above the strike price (true) or below the strike price (false) at expiration. Binary options will always settle at 0 if false and 100 if true.

As a binary options trader you can profit from either a true or false scenario. This is because you can buy or sell the binary option contract, depending on where you feel the underlying instrument is heading. You can also use binary options to profit from volatility. This means that you can use binary options to forecast market ranges and breakouts without having to predict direction.

For example, if you see a strong support level on a certain underlying instrument, you can use binary options to speculate on the underlying's not going below that level. Notice how you do not have to forecast where the underlying will go. You are simply forecasting where it will not go. Unlike with many other instruments, you can do this with a relatively low deposit amount.

COMPONENTS TO A BINARY OPTION

There are three main components to a binary option. This section covers these components in great detail.

The key components are:

• Strike price
• Expiration
• Premium/Price

Strike Price

When trading binary ...