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Types of Binary Options

 

Binary options have exploded in popularity over the last few years. They are an accessible and forgiving entry point to trading for newcomers. A binary options trader knows exactly how much they stand to win or lose in advance of the trade and can set a specific time frame for the exchange to happen. This makes trades hassle free and efficient.

There are a number of different types of binary option trades and payment systems to choose from. Each one creates a different dynamic for the trade and asks for you to read and forecast asset price movement in a different way. In this article we are going to look at the different payment systems and the 4 most popular types of binary trading.

 

Cash or nothing

 

By far the most common form of pay out, cash or nothing trades are where the trader will receive cash profits if they make a correct prediction on the asset price movement and lose their investment if they make an incorrect one. In binary trading, you will never incur losses that are greater than the amount you invested on the specific trade that you executed. This means the money in your account is safe and won’t ever be touched by the broker. The broker will state these terms when you sign up as a member of their website.

 

 

Cash Or Nothing With Rebates

 

Some brokers offer rebates to traders whose options expire out of the money. For instance, if you were to trade £200 on a binary option, the broker might offer a 10% rebate if your trade expires out of the money. In this case you would take £20 home despite your loss. Rebate systems help you to trade with a lower margin of risk. To fund a rebate system, brokers find money elsewhere by lowering the returns on winning trades. This means that if you want to make a big risk, high stakes trade, you are likely to find better returns on cash or nothing systems that don’t feature a rebate.

 

Cash Or Nothing With Buy-Out Clause

 

There are some binary options brokers that offer a buy-out clause feature. A buy-out clause will allow you to end the trade before the trade has expired. You may want to use this feature if you realise that you have no chance of winning quickly after placing your trade. You will incur a loss when you use a buy-out but it but it will be less than the amount you would have lost had you continued the trade through to the expiration time.

 

 

The buy out clause can also work in the opposite way. Some brokers will offer a feature to cash in your winnings early before the expiration time. If you are ‘in the money’ during a trade but concerned that the asset price is going to fall out of the money before the expiry time you can use a buy out clause to lock in your profits immediately. If you execute this clause you will exit the trade rather than see it out to the end and receive a proportion of what you might have won had the trade expired. You will win some profits by buying out early, but once again they will be less than if you had seen the trade out to the expiration time.

 

Asset or Nothing Binary Options

 

Asset or Nothing binary options have the same format as cash or nothing trades - you win a percentage of profits for a correct prediction about the asset price movement or you win nothing. However, in this type of binary, the profits are paid out in the asset that you are trading on rather than cash. If the value of this asset is increasing quicker than the exchange rate of your home currency, you can maximise your winnings by keeping your money in assets.

 

Types of binary trading

 

Call or put

(Also known as High/Low or Up/Down)

 

The objective with a call or put option is to predict correctly whether the asset price will rise or fall during the specified time period of the trade. When you initiate the trade you set the strike price. If you think the asset value will finish above this strike price when the trade expires you have made a call option, if you think it will fall you have made a put option.

 

 

You can see how this works in the diagram below. On the left hand side of the image it is indicated that the participant has traded on a low, or put option. This means that they have forecasted that the asset price will finish up below the strike price when the trade expires. At this point in time their prediction is proving to be correct. They are currently in the money, as indicated by the fact that the graph line is in the green section.  If the graph line were to creep above the starting value of 1.02700 they would be out of the money. This trader placed their 30-second trade at 40.12. They stand to win $40.80 if the asset price is still in the money in 15 seconds time.

 

 


Boundary options

(Also known as range options or tunnel bets)

 

These options usually include a higher risk of loss and higher potential returns. This is because you trade on a smaller margin than in a call/ put option. Instead of trading on a rise or fall in the price of the assets, you trade on whether the asset will finish within a specific price range when the trade has expired. The price range, otherwise known as a boundary, is specified before the trade begins. It is not uncommon for range options to have 300% potential profit. The profit percentage is usually relative to the size of the price boundary that you are speculating on. The smaller the margin, the greater the gains.

 

You can see an example of a boundary trade in the image below. The light grey area indicates the asset price boundary and the asset price is currently outside of this boundary. If the trader speculated that the asset price would finish up outside this boundary they will take a 70% profit from the trade.

 

 

Touch/No Touch Binary Options

 

With this type of binary option the objective is to predict whether the asset price will touch a particular price level before the expiration of the trade. A touch options is where you predict the trigger price will be hit and a ‘no touch’ is where you predict that it won’t. The trade expires immediately if this trigger price is hit. To make profits from these types of trades it is important to track how the asset price has been fluctuating in the past. Volatile fluctuations can make a touch trade very risky, so look for assets with solid fluctuation patterns. Unlike call/ put options, as soon as the trigger price has been touched, the trade is over.

The image below shows how touch/ no touch trades work. You can see on the left that the trader has wagered that the trigger price will be touched. The current asset price is on a trajectory towards touching but it has not touched at this point in time. There are still 9 minutes 22 seconds of the trade remaining. The trader stands to take a 67% profit if there is a touch.

 

 

Double Touch/ Double No Touch Options

 

These types of trades use exactly the same principle as touch trades. The difference is that there are 2 touch triggers instead of 1. Working under the premise that asset prices continually fluctuate up and down in value, double touches have a touch trigger at the low extreme and high extreme of the price range. The objective of the trader is to predict whether the asset price is going to fluctuate enough that it hits the triggers at both ends. When both triggers have been touched the trade is over. If you correctly forecast a double touch or no double touch, you stand to receive a big pay out.