Kindergarten

Options trading basics | Glossary of Binary option Trading

We are proud to present the Great Glossary of Binary Options, with all the different Binary Options, Financial and Fundamental Terms, including short explanation for newbies. 

Options Trading Basics:

A

Asset/Underlying Asset

Often called an underlying asset this refers to the type of item that you are trading on. This is the asset in which you are purchasing an option against. Examples of assets include: USD/GBP, USD/EUR, Gold, Silver, FTSE-100, Dow Jones, Google Inc, Apple Inc and many more.

At The Money

This term refers to the position in which the option is in when it expires neither in-the-money or out-of-the-money but at the same price at which it was purchased (target price). In this situation there would be a neutral gain.

American Style Option: A type of option that can be exercised at any time prior to expiration. It is part of the wider category of Options called “Vanilla Options”

Ask Price: It’s the price a seller asks when he wants to sell an option or stock.

B

Bearish Market

The terms bearish is used to describe a financial market or stock who’s price is generally on a decline.

Binary Options

Binary options, also known as digital options, or all-or-nothing options, are contracts which have only two possible outcomes – either they win, or they lose — therefore binary by nature.A binary option involves a fixed payout after the underlying stock meets or exceeds its predetermined threshold or strike price.Values of binary options payouts are determined at the start of the contract and aren’t affected by the magnitude of movement of the stock value.Binary call optionspay the predetermined amount providing the price of the underlying security exceeds the strike price at expiration.Similary, binary put options pay the predetermined price if the price of the underlying security is trading at less than the option strike price at expiration.

Boundary / Range Instrument

The term boundary or range instrument allows a trader to decide whether the price of the underlying asset when the option expires will be inside or outside a specified range. The range is specified by higher and lower target price limits.

Broker

A broker is someone or a company acting as an agent in where they make a contract between a trader and themselves in respects to purchasing options. Examples of brokers include: 24Option, OptionFair, AnyOption and Trade Rush. Each broker has a different set of assets available to trade and details specific to them.

Bullish Market

The terms bearish is used to describe a financial market or stock who’s price is generally on an incline.

Bullish Market

The terms bearish is used to describe a financial market or stock who’s price is generally on an incline.

BOT/Autotrader – Computer programs used to automate Binary Options trading. In some ways they are similar to Expert Advisors but often the performance of BOTS/Autotraders is exaggerated through marketing and get-rich-quick promises. Once turned on, the BOT/Autotrader makes trading decisions and opens trades based on the parameters chosen by the user or by the programmer.

C

Call

Choose binary call options if you predict that the value of the item you are trading at will increase in price by the time of your chosen expiration. If the strike price increases in that time, you earn money based on the percentage set prior to bidding.

Commodities

This refers to one of the underlying asset types in which options can be purchased. A commodity is usually a physical item like Gold, Silver, Wheat and Cotton and the price of these is determined by economic factors.

Currency

A currency is an asset type that can be traded. Currencies are traded in pairs and common examples of these are: USD/GBP, USD/EUR, USD/CAD and many more.

Current Price / Market Price

This is the current price of the underlying asset which is reported in “real time” without delay typically by a data provider. Some brokers/trading sites report results that can be delayed and they often mention this in their terms and conditions.

Cable: Trader slang referring to the GBP/USD exchange rate

Central Bank: A monetary authority, financial institution that manages a country’s monetary supply and interest rates. It also oversees the entire commercial banking system of the respective country.

Cover: An action taken for lowering the risk exposure, usually by closing an existing position or opening a counter position.

Current price: The price of an asset reported in real time

Currency Pair: Two currencies valued against each other constitute a currency pair

Call Option: One of the two types of Binary Options. It reflects a trader’s belief that the value of an underlying asset will be higher at expiry time than it was when the option was purchased.

Chart: Graphic representation of a certain asset’s price movement.

Commodity: A generic term used for any marketable good produced to satisfy certain needs and can be traded through exchanges.

Crude Oil: A liquid fossil fuel extracted through drilling and known as one of the most traded commodities

Currency Pair: Two currencies valued against each other constitute a currency pair

D

Deposit

In order to start trading you need to add funds to your trading account. This adding of funds is called a deposit. Different brokers offer varying minimum deposits anywhere from $100 up to around $500.

Day trade:

A trade that is opened and closed within the same day

Depreciation:

A decrease in the value of a certain asset

Downtrend:

A general decline in the price of an asset, also characterized by lower lows and lower highs

Demo Trading: A way of trading without risk, using virtual money. Some brokers allow their clients to open these virtual money accounts (Demo) so they can test the broker’s platform as well as the profitability of the strategy they are going to use when investing real money. Demo Trading is mostly used as a way to train and test, before putting real money on the line. Most Demo accounts are free but some brokers require you to deposit.

Digital Option: A different term used for Binary Options

E

Early Closure

Early closure is where a trader has the ability to close an option and immediately expire it ceasing the contract.

Expiration/Expiry Time

This refers to the time and date at which the option you have purchased will expire. When the option has expired it becomes void and ceases to trade. With binary options, expiry times are shorter than traditional investments and can be any of the following, 60 seconds, 15min, 30min, 45min, 1hr, 24 hr and weekly.

Expert Advisor: a computer program that allows the automation of trading processes (Buy, Sell, Close, etc.). The terminology Expert Advisor (or Expert, or EA) refers to programs coded for the trading platform Meta Trader 4. Other platforms use different coding languages so these automation programs have a different name but are generally known as EAs.

Expiration Price: The price of the underlying asset when the option expires

H

High/Low

When you select to trade using High/Low option (often referred to as Call/Put) you are predicting whether or not the underlying assets price at expiry will be higher or lower than the strike/target price. If you choose High (Call) you are predicting it will arrive above and if you select Low (Put) you are predicting it will arrive below the target price.

Holder: A trader that has an open position in the market. If a person purchases a Call or Put option, he/she is the “holder” of that position until expiry or any form of early closure.

I

Inbound Option

This term is an option on a Boundary/Range Instrument and refers to when the underlying asset expires inside the higher and lower limits of the target prices.

Index Binary

Index Binary refers to an option whose underlying asset is that of an index. These can include such assets as: FTSE-100, Dow Jones, Nasdaq-100 and many more.

Instrument (Financial Instrument)

Often referred to as Financial Instruments or Assets, it is another term which refers to the underlying Stocks, Commodities, Currency Pairs or Indices.

In The Money

This term refers to the point when a purchased option realises a gain and the trader makes a profit. An option is in-the-money if you place a High (Call) option and the options price expires above the target price. If a Low (Put) option is placed then you are in-the-money when the options price expires below the target price.

Investment Amount

This is the amount of money that is invested when purchasing an option. Typical investment amounts can range from $1 up to $1000’s and the amount at which you can invest in any single option is li In the Money: The term describes an Option that is currently showing a profit. For a Call Option to be In The Money, the current price needs to be above the strike price. Vice versa is valid for a Put Option.

Index (stock market index):

Method of calculating the average value (differently weighted) of the stock price of different companies contained in the index.

N

No Touch

This is an option on a One Touch instrument.It refers to when the price of an asset does not reach the target price during the lifetime of the option. If at any time the price of the asset does reach the target price it will instantly expire ‘out-of-the-money’.

O

One Touch

A one touch instrument is where you predict whether the underlying assets value will reach a target value when the option expires. If it does reach the target value then you are ‘in-the-money’ otherwise you fall short and are ‘out-of-the-money’.

Outbound Option

This term is an option on a Boundary/Range Instrument and refers to when the underlying asset expires outside the higher and lower limits of the target prices.

Out of the Money

This term refers to the point when a purchased option has no gain and the trader makes a loss on their investment. An option is out-of-the-money if you place a High (Call) option and the options price expires below the target price. If a Low (Put) option is placed then you are out-of-the-money when the options price expires above the target price.

Option Period:

Often referred to as an option’s lifetime, the period between the purchasing of the option and the expiry time.

Out of the Money:

The term describes an Option that is currently showing a loss. For a Call Option to be Out Of the Money, the current price needs to be below the strike price. Vice versa is valid for a Put Option.

P

Put

Choose binary put options if you predict that the value of the item you are trading at will decrease in price by the time of your chosen expiration. If the strike price decreases in that time, you earn money based on the percentage set prior to bidding.

Paper Trading – Very similar to Demo Trading, but this method doesn’t include actual trading. Instead, the user notes down all the details of a trade he/she would take and then waits for expiry (if the paper trade is taken in real time). Paper trading can be done on historical charts – the user checks for places where his/her strategy would signal a trade and then checks to see if the trade would expire ITM or OTM.

Payout: The profit realized if a Binary Option expires In The Money

Pip: The smallest amount by which a Forex quote can move, generally the fourth decimal: 0.0001. Lately we see more and more brokers that offer five decimal quotes.

R

Refund

A portion or the full amount of your investment you make is often refunded if your option expires ‘at-the-money‘. Some brokers may even refund you a portion of your investment on average around 15% if your option expires ‘out-of-the-money‘. Check each broker for refund options.

Return

This refers to the amount you stand to make after the option you have purchased expires in the money. Returns can depend on the instrument you are trading with along with the specific asset and different brokers. The return value will be clearly stated before you purchase your option so you always know what you stand to gain or lose. For example: if you made an investment of $100 and the return was 85% you would stand to gain $185 after the option expires if you are in the money.

Rollover:

An instrument offered by some Binary Options brokers that allows the trader to extend the expiry time of an option

S

Stock

A stock refers to the stock of a specific company which are available to trade on the financial stock market. Examples of stock include: Apple Inc, Google Inc, Facebook, BP, Barclays and Vodafone.

Strike/Target/Purchase Price

The strike price (often referred to as purchase or target price) refers to the price of the underlying asset at the time at which you purchase the option. When the option expires, the new price of the underlying asset  at the time of expiry is compared to the strike price to determine whether your option has gained value (“in the money”) or lost value (“out of the money”).

Share:

A single unit of ownership in an organization, mutual fund or company. The total company capital is divided into shares. 

Signal

A signal can be generated by a Signal Provider Service, which can he a human with knowledge of the markets or a binary options computer program (similar to Expert Advisor), or a BOT/Autotrader. Usually these signals are received via SMS, email, Skype or other messaging services.

Strategy – A clear set of rules that when fulfilled, offer the user a signal to trade. It is a fixed plan that can be back-tested and forward-tested and has to contain clear entry/exit points and money management rules.

Strike price: The price at which the holder of the option can purchase (call) or sell (put) the underlying asset.

T

Touch Binary Option:

A type of Binary Option that brings a profit to the trader if price touches a certain predefined level just one time during the option’s lifetime.

U

Underlying Asset Types

The type of asset refers to which financial category each asset falls into. The main asset types that are available to trade in are Stocks, Commodities, Indices and Currencies. Examples of asset types and their assets are listed here:

  • Stocks: Google Inc, Apple Inc
  • Commodities:Gold, Silver, Crude Oil
  • Indices: FTSE-100, Nasdaq
  • Currencies:USD, GBP, EUR

UP/DOWN Binary Option

One of the most common types of Options, where the trader chooses UP if he/she thinks that price at expiry time will be higher than the opening price or DOWN if he/she thinks price will be lower at expiry time.

W

Withdrawal

After making successful investments it’s time to take the money back out of your trading account, this comes in the form of a withdrawal. A withdrawal can take some time depending on the broker and also cost depending on which method you have chosen to withdraw your funds with.

 For more to know go to  this link

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Binary Option Kindergarten

All Lessons in Part 1: Binary Options basics

Lesson 1: What are binary options
Lesson 2: Binary Options VS Forex
Lesson 3: Binary Option VS Gambling
Lesson 4: Options trading basics
Lesson 5: Types of Binary options
Lesson 6: What is traded in Binary Option
Lesson 7: 60 seconds Binary option

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David Richard

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