Options are the most complicated financial instruments the ordinary investor is likely to encounter. That’s because they add a layer of complexity onto all the details affecting the underlying security. That is, if somebody wants to buy or sell options on Google, ideally they should analyze Google the company and its stock as an investment. Then they must also analyze the options available to them. They must consider the prices of available calls and puts, and option strategies. People need to understand the concepts of “Delta” and “Vega,” not just “in the money” and “out of the money.”
However, binary options are much simpler, at least on the surface. The trader has an opinion on the direction of the underlying security. They then buy or sell the binary option, paying under $100. Like ordinary options, there is a strike price and an expiry date and time. If the underlying security is in the money at the time of the expiration, the binary option owner receives $100 per option contract. If it’s out of the money, they get zero. That’s why it appears simpler. There are only two possible outcomes. In the money pays $100, out of the money pays $0. The probability calculation is inherent in the price paid. If the trader pays $20, the odds of getting $100 back are considered low. If they pay $90, the odds are high.
Unlike regular options where the expiration date is the third Friday of a month, the binary option expiry may be in the next 5 minutes. Although some contracts may be as long as month, and weekly and daily ones exist, most binary traders are in and out within minutes.
Traders can use binary options to make money on various indexes such as the Dow 30, the S&P 500 and NASDAQ 100, foreign exchange pairs and commodities.
Within the United States, the binary option exchange is Nadex. It provides traders with its own trading platform. They get access to real-time price quotes and charts. Each contract costs $0.90 to enter and $0.90 to exit, and the commission goes only to $9 per trade. Therefore, if someone buys 20 contracts, they pay just $9, not $18. That is a cost savings for traders who can afford higher volume. The Chicago Board of Options Exchange (CBOE) offers some binary options as well for everyone approved to trade options through their regular brokerage account.