Do not be alarmed. On the first impression the name binary options may sound a bit intimidating to every newbie, but the truth is that it’s not and that binary options are actually a simpler way of trading than Forex is.
Besides being similar in all sorts of ways, binary options and traditional options have their own differences as well. What is common for both of them is that also binary and traditional options have a premium, a strike price, and an expiration date. But the differences are a bit more complex than that.
Firstly, when playing with binary options, the “premium” for the option or for the asset is chosen by the trader. The price is usually determined according to the market of traditional options.
Secondly, expiration time frames are much shorter. Traditional options have an expiration date which can last from a week and can go as long as a couple of years. But with binary options, the case is not so. Here the expiration date can last from a single minute to a few days. This way you do not have to wait long periods in order to cash in because the expiring period allows you to earn money quickly opposed to traditional options.
So this is what you basically need to know about the similarities and the differences between the traditional options and the binary options and is actually how a trade is calculated. But before getting started using binary options you will also need to know how binary options trades actually work.
In the case of binary options, the broker pays out only a percentage of the premium at risk of the conditions of the contract being met. Or, for example, the broker will pay when the market price is at or over your target strike price at the point of expiration while choosing a call option.
In simpler terms, you will receive a predetermined fixed profit. It does not matter how much or how far the market moves beyond the strike price or met the conditions of the contract, your income out of this deal will always be the same. So to explain it to you a little bit more closer, whether the market moves by 1 pip or by 200 pips, your profit will be the same either way for that asset when the expiration date elapses.
So the profit is yours not depending on the amount of the pips the market closes on above the strike price, the only thing it matters is that it is higher and the money you get is the same either way. Out of this reason, binary options are also called “all-or-nothing” options.