Kindergarten

Types of Binary Options, their rules and examples

Lately we have seen more and more types of Binary Options being available for trading. Sometimes it can get confusing, especially for the new Binary Options trader. The binary options brokers usually do a pretty good job explaining the differences between them, unfortunately sometimes they lack simplicity in their explanations and most of the time they are concerned with telling us how much money we will make instead of how to make it. That’s the reason why we find it appropriate to explain the main types of Binary Options in a simple and easy to understand manner, and of course, using pictures. After all, we all know a picture is worth a thousand words. So let’s get the ball rolling and start with the most common types of binary options.

Most Common Types of Binary Options:

  • Call / Put
  • TOUCH
  • Range
  • 60 Seconds Binary Options
  • Pair Options
  • Ladder Options

Call / Put

This is an easy one: If I select UP (Call) and the price at expiry time is even one pip higher than the price where I opened, I win the entire payout. If I select DOWN (Put) and the price at expiry time is even one pip below the price where I opened the trade, I win the entire payout.

Rules

Call: win if price expires higher that the opening price

Put: win if price expires lower than the opening price

Example

callput

At 15:00 the rate of the USDJPY pair on the currency market is 119.088 JPY per USD. You expect the price of the asset to rise over the course of the following hour. You select a Call / Put binary option contract on USDJPY that expires at 16:00. Since you expect the price to rise, you choose an CALL option, investing 300 USD.

At 16:00 the price of USDJPY has risen to 120.048, meaning your prediction turned out to be correct. Since the Payout on the option is 90%, you earn 270 USD on the trade: 300 USD × 90% = 270 USD.Source: alpari.com, “Binary Options Types”

TOUCH

When using a ONE TOUCH option we express our opinion that the price will touch a certain level before time expires. We just need the price to touch the level once, until expiration and it doesn’t matter where the price goes once our price is touched because our trade has already won. For a NO TOUCH option, the opposite applies: we will receive the payout if the price doesn’t touch the predetermined level. Here comes the picture:

Rules:

ONE TOUCH: win if price touches the target price until the expiry time.

NO TOUCH: win if price does not touch the target price until expiry time.

Example

Screenshot_6

At 11:45 gold is trading at 1,600 USD per ounce. You expect the price to reach 1,625 USD per ounce within the hour, so you select a Touch option on gold with 95% profitability that expires at 12:45. Once you have selected this option, you see the following 3 price levels:

1,625: the upper price boundary

1,600: the current price of gold

1,580: the lower price boundary

Since you expect the price of gold to rise to 1,625 USD, you choose the “UP” option, investing 200 USD.

Over the course of the hour, the price of gold breaks the upper price boundary of 1,625 USD, eventually reaching 1,627, before dropping down below the price at the time the trade was placed.

Since you chose a Touch option, it doesn’t matter that the price was down at expiration – all that matters is that the price broke the 1,625 USD upper price boundary. Since your forecast was correct, you earn 190 USD on the trade: 200 USD × 95% = 190 USD.Source: alpari.com, “Binary Options Types”

Range

When using an “IN” option, a trader expects the price to move between an upper and lower level (the boundary) without closing outside at expiry time. Let me give you an example: EUR/USD is currently trading at 1.2000. Let’s assume the upper boundary is set at 1.2050 and the lower boundary is set at 1.1950 and we choose “IN”. If at the expiry time, EUR/USD trades anywhere between 1.1950 and 1.2050, we receive the payout for that trade.

For an “OUT” trade, we need the price to close, of course, out of the boundary. Check out the picture below to see what a potential Boundary trade looks like.

Rules

“IN” win: at the expiration time, price is inside the boundary

“OUT” win: at the expiration time, price is outside the boundary

Example

Screenshot_7

At 18:05 EURUSD is trading at 1.3020. You expect the price to drop a few pips over the course of the next 5 minutes. Accordingly, you choose a Range option with a 95% Payout on EURUSD that will expire at 18:10. Once you choose this option, you see 3 price levels:

1.3027: the upper price boundary

1.3020: the current price of EURUSD

1.3012: the lower price boundary

By 18:10 the price of EURUSD has dropped to 1.3014, 6 pips below the market price at the time you placed the trade, but still above the lower price boundary of 1.3012.

Since the price dropped, but didn’t drop beneath the lower boundary level, you earn 950 USD on the trade: 1,000 USD × 95% = 950 USD.Source: alpari.com, “Binary Options Types”

60 seconds

You might wonder “What exactly is 60 Seconds trading?” 60 Seconds options are actually CALL/PUT options that expire in 60 Seconds (pretty straightforward, right?). If I select UP (Call) and at expiry time (60 Seconds later), the price is higher than what it was when I placed my trade, I win the trade and receive the payout. Vice versa is valid for DOWN (Put). Yup, that’s it, but let’s see what are the pro and cons of this type of Option.

Rules:

UP: win if price expires higher that the opening price

DOWN: win if price expires lower than the opening price

 Example

Gold-Trade-on-60-Seconds

If you place a trade at 14:45:32, your binary option expires at 14:46:32, 60 seconds later.

If it goes above, you get the payout.

If it goes below, you lose!

Pair

Does the name says it all? Well, not quite, but it says a lot: in pair options, you pit one asset against the other and pick which one you think is going to perform better until the expiry time.

Rules:

Even if the stock you’ve picked goes in an opposite direction than you originally thought, you can still win because all that matters is how it performs compared to the other. So in our example above: even if you thought Facebook will go up but it went down, you can still win if Google went down more.

Example:

For the pair Vodafone / British Telecom you open a Fixed Pair Option trade of $100. You picked Vodafone to be the better performer by the end of the day. The option is set to return 82% if Vodafone performs better.

  • Relative performance is measured for each stock from the time you placed the trade (option start).
  • If Vodafone is the better performer, your option expired “In the Money” and your payout is
  • $182 ($100 initial trade + $82 return).
  • If British Telecom is the better performer, your option has expired “Out of the Money” and you don’t get a payout.
  • With Pair Options, you don’t have to wait until the expiry since it enables closing a position before expiry.

The direction of the asset is not very important with Pair Options and all that matters is to compare how the two components of the pair perform against each other. Because direction is not involved, sometimes it’s easier to trade Pairs than Up/Down, especially if you are familiar with certain stocks, indices or commodities involved in the pair.

Spread

Predict if the price will be above or below the price level offered by the company at expiry. If the prediction is correct, then on expiry the profit is 100%!

Example

 Screenshot_8

  • At 12:10 (EET), soon after the opening of the UK stock market, the GBPUSD exchange rate is at 1.65000, and is showing steady growth.
  • Predicting that the growth will continue, the investor decides to trade a Spreadoption, using GBPUSD as the base asset. Your investment is based on the idea that at 13:00, when the option expires, the price will be above the offer level at1.65030.
  • You invest 500 USD, choosing “CALL”.
  • At 13:00 (EET), the price of the GBPUSD instrument has risen to 1.65500, meaning that your prediction was right.
  • You make a profit of 500 USD × 100% = 500 USD, the investor has doubled their funds

———————————————————

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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