How Can Trade Binary Options?

1864 Words Feb 11th, 2016 8 Pages
How to Trade Binary Options?

An option as a financial instrument has been used to carry out transactions since the mid-twentieth century, but only in the recent years has the development of internet technologies made it possible to significantly democratize the options market: individuals have become able to trade options contracts using the so-called digital or binary options (in the US they are called FRO, Fixed Return Options, which means ‘fixed-income options’). A binary option is a specific case of the standard option contract which is structured so that the potential profits and potential losses are known before the transaction. This allows you to significantly speed up the algorithm for determining the value of the option, and also simplifies the process of risk management on the part of the trader.

Each option contract has an expiration date; i.e. a pre-fixed time after which the outcome of the transaction (profit or loss) is determined, as well as the underlying asset – i.e., a share, an index, or a currency pair, the price movement of which determines the aforementioned outcome.

Let us look at an example. Let’s say a trader buys a 15-minute option to increase (also referred to as a ‘call’) for $100, where the underlying asset is gold. Let’s also assume that the alleged profitability of this option is 90%, and at the time of the purchase of the option the price of gold was $1,100 per ounce. If after 15 minutes the price of gold is more than $1,100 per ounce, the…
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