The extensive usage of online platforms for binary trading has also brought down the brokerage cost levels substantially. Provided that the options remain ‘in-the-money’ on maturity, they can ensure fixed payoffs for the holders. If the price of the underlying asset, however, does not move as per the traders’ speculations, the binary options become ‘out-of-the money’, and investors do not get anything (hence the name, ‘all-or-nothing options’). In the present discourse, we would look at the different varieties of binary options.
The ‘Touch’ option
One of the most popular binary options that are available is the ‘Touch’ option. This category of option allows traders to specify whether they think that the value of the underlying asset would or would not touch a certain pre-specified level, on or before the date of maturity. If the prediction of the investors matches the actual price movements of the asset, they stand to win handsome payoffs. The rate of return from such ‘Touch’ binary options is pre-specified in the contract.
The ‘High-Low’ binary option
The ‘High-Low’ binary option is also widely traded in the markets. In this particular variety of binary option trading, the holders have to predict whether the market price of the asset on the maturity date will be above or below the price at which it was initially purchased. Payoffs are generated if the prices move according the expectations of the option-holder. However, it needs to be kept in mind that all such price changes have to be in such a manner that the binary option remains ‘in-the-money’. The rates of return that can be earned from these types of options are generally very high.
The ‘Range’ binary option
Traders can also choose to deal with ‘Range’ binary options. Over here, traders are required to make estimates as to whether the price of the asset would remain within a specified range, or move out of it. Just like the previous two cases, here too, investors can get profits only if their predictions prove to be accurate.
Binary options can also be classified under two broad heads – the ‘Cash-or-nothing’ options and the ‘Asset-or-nothing’ options. Under the first category, a fixed, pre-specified amount of money is paid to the option holder on the maturity of the option, provided that it remains ‘in-the-money.’ While the mode of working of the ‘asset-or-nothing’ binary options is essentially the same, here the traders are offered the value of the underlying asset as the payoff.
Factors to Remember
Holders of any type of binary option need to be proficient in analysing price trends and fluctuations, in order to be able to make informed forecasts. While traders with rich experience in the financial fields can, of course, make better speculations on price movements, several analytical models are also available for estimating the same. The Black-Scholes model, in particular, is often used by binary option experts to gauge future prices.
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