Binary Option Trade Examples
Here is an example of a typical binary options trade.
The trader thinks that crude oil will close at or above $87 at 2:00 p. m. can buy a call option on that outcome.
The trader who thinks that the crude oil strike price will close at or below $87 at 2:00 p. m. can buy a put option.
At 2:00 p. m. the crude oil spot price is $86.99 the trader believes this will increase, so he buys 10 call options for crude oil at or above $87 at 3:00 p. m. at a cost of say $40 each.
The risk involved in this trade is known. The trader’s gross profit/loss follows the ‘all or nothing’ principle. He can lose all the money he invested, which in this case is $40 x 10 = $400, or make a gross profit of $100 x 10 = $1000. If the crude oil strike price will close at or above $87 at 2:00 p. m. the trader’s net profit will be the payoff at expiry minus the cost of the option: $1000 – $400 = $600.
The trader can also choose to liquidate (buy or sell to close) his position prior to expiration, at which point the option value is not guaranteed to be $100. The larger the gap between the spot price and the strike price, the value of the option decreases, as the option is less likely to expire in the money.
In this example, at 2:00 p. m. the spot has risen to $87.05. The option has expired in the money and the gross payoff is $1000. The trader’s net profit is $600.
Binary Options Exchanges
Binary Options trade on exchanges or platforms run by brokers like the ones listed in the sidebar. Visit a few of them and you will see the difference between their platforms.