Sunday, March 1, 2015

Classification of Binary Options

The steady & rapid advancements in the financial sector have led to the birth of various types of binary options. The striking features of them being that they are still amiable to the traders and do not increase the complexity in comparison to the basic binary options.

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The trader has to foresee the course of his asset's value; whether it would increase or decrease regardless of other assets and for that he will receive selected amounts of reimbursements on successful predictions or nothing otherwise. Listed below are different options classes following the principle of creating an unbiased market open to all traders. "Cash or nothing" & "Asset or nothing" binary options In the "Cash or nothing" binary options the winning traders get a previously set contractual amount of cash till the price of the asset remains above (on a call) or below (on a put) with respect to the asset price in the contract at expiration of the term. 

The profit or loss of a trader does not vary with asset price at expiration as the payout is decided when the contract is signed. E.g. on a purchase made at binary call options on Apple's stock struck at $ 100 with a binary payoff of $ 500, if at expiry of contract the stock is at or above $ 100, $ 500 is received by the winning trader, but if the stock trades below $ 100 nothing is received by the trader. 

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In "Asset or nothing" however the approach is non-traditional. The trader is given ownership of an asset instead of a contracted amount of cash. So the profits of the winning trader are decided by the asset price at expiry i.e. the trader is paid the value of his asset in case of thriving trade and nothing otherwise. For e.g. on a call bought at $ 50 on binary options for a stock at a strike price of $ 90, and the stock price is at $ 120 at expiry, the trader receives net profit of $ 70. But if the stock price goes below $ 90 after expiry the trader gets nothing. Together these two constitute the most basic forms of binary options. "One Touch" & "No Touch" binary options This class of binary options allows the traders to predict whether the value of their asset would reach a certain level throughout the lifetime of their contract. In "One touch" the winning traders get paid a fixed amount as soon as the asset price reaches a given level before the expiration of the contract. In "No touch" opposite rules are followed. If the asset value always stays either above or below a specified level till expiry of contract then winnings are paid, but in case the asset price touches the specified level the contract is rendered worthless. It must be noted that in case of no touch if the trader decides a level far away from the spot rate, then the payout is much less as the probability of the asset not touching the set level is high. 
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