What Are Binary Options?

Submitted by: Chris Carter

In today's trading market there are literally dozens of options for the investor. Day trading, futures trading, commodities trading, FOREX trading (Foreign currency trading) just to name a few and are all viable trading options in today's market. But less are as popular today as binary option trading. Some people have heard of it some and people have not but the fact of the matter is, it is one of the more popular and risk to ROI types of trading in the business.

Here is a little history on options and how binary options evolved before we get started: The trading of options has been around for many decades and for a majority of that time was pretty much unregulated. Option trading was primarily considered OTC or over-the-counter transactions with very little regulation. Then in 1973 the Chicago Board Options Exch

 

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ange was formed as a venue for trading options with specific regulations. Along with the formation of the Options Clearing Corporation, option traders could now be held to a higher standard of accountability for any trade they make punishable by temporary or permanent suspension for any regulation indiscretions.

Binary options became a derivative of standard options trading early on and itself was primarily an over-the-counter transaction with minimal regulations. Binary options at first were actually one smaller part of much larger complex options and at that time were not considered much of a viable trading option. It wasn't until recent years in the mid 2000’s that binary options would start to gain a foothold. With its increased popularity, in 2007 the Options Clearing Corporation made a change in the rules to allow binary options to be legal tradable contracts on the open market. As you can imagine with this change binary options popularity skyrocketed and in 2008 the American Stock Exchange became the first exchange to offer binary options publicly.

So what is a Binary option? A binary option allows for a payoff that is a fixed amount of an asset or nothing at all. It is a very black and white cut and dried form of option trading. Binary options exist in two main types: cash-or- nothing and asset-or-nothing. From either you are going to get only one of two results, and you are either in the money or out of the money hence the name binary. With a cash-or-nothing binary option a fixed amount is paid in cash if the option expires in the money. With the asset-or-nothing option, the value of underlying security is what pays. For example, let's say you purchase a cash-or-nothing call option on Acme Company’s stock at $50 with a binary payoff of $500. Then at the maturity date if Acme company's stock is trading at $50 or above you receive $500, if it is trading at less than $50 you get nothing including your initial investment.

Due to the Internet and the creation as well as implementation of many extraordinary tools for trading, binary options popularity has soared. Due to the expansion of online trading, now your everyday average day trader can now partake in every form of trading as well as option trading right from the comforts of home and binary options have become the trade of choice.




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