Terms Used in Binary Options Trading24 Apr 2013, 08:00
All financial markets make use of specific terminology which is not always easy to understand by new players. The binary options market makes no exception. It has its terms which might confuse newcomers and give them the false impression that they will never be able to understand this market. In fact, terminology used when trading binary options is pretty simple and once it is explained, there is no problem in understanding it. Even persons with no knowledge in the financial field can understand the terms on the binary options market, which is not always true when it comes to other markets.
Here are some simple explanations of the basic terms which are used when trading binary options. Once you master those, it would be easier to understand how the market works.
• Binary options – knowing what you are trading is a good starting point in understanding basic terminology. The term binary is pretty suggestive in what concerns the nature of these options. They can only have two possible outcomes and as long as you are able to predict the correct one, you win. In case your prediction is not good, you lose the money you placed on that trade. Otherwise said, the potential profits and losses are known in advance. You can indeed make money on this market, but given the fix nature of earnings and losses, there are no spectacular winnings or unexpected and huge losses.
• Call Options – these are the options that you should trade when you predict that the price of an asset will increase in a certain period of time.
• Put options – they are opposed to Call options and they are traded when you assume that the price of an asset will go down in a specific period of time.
• In the money – if your predictions are correct, than your trades end in the money. This means that they won and you have made profit. For instance, Call options end in the money when prices indeed go up and Put options are in the money when prices decrease.
• Out of the money – naturally understood, this is the opposite term for “in the money”. Trades placed on incorrect predictions finish out of the money. If the price goes down, a Call option would be out of the money. Similarly, if the price increases, a Put option would be out of the money.
• At the money – there is also another possible scenario: at the end of the trade, the price went neither up nor down and it is the same with the initial price. This means that the trade was at the money and you will get your investment back without winning or losing anything.
• Expiry time – this is the time at which a trade ends and the price is evaluated to see if it went up or down. At this time you can tell whether your predictions were correct or not.
Understanding this basic terminology will help you make your way on the binary options market with ease.