In a binary option, the payoff for a trade made is a fixed amount of money in value for a particular asset or they get nothing. The two major types of binary option are:
- The cash-or-nothing binary option
- The asset-or-nothing binary option
Strike price is the price at which the owner buys or sells an asset.
The buyer trading the binary option is the owner who can buy the asset at a fixed price within an hour, week or day as preferred, but without an obligation to do so.
The buyer chooses to guess (strike price) if the asset will reach a particular hit price or not before the period of expiry of the call.
The Cash-Or-Nothing Binary Option
In cash-or-nothing binary option, the investor gets the pre-determined fixed amount of money for the asset in payoff.
The Asset-Or-Nothing Binary Option
In asset-or-nothing binary option, the investor gets the existing value for the asset in question in payoff.
Since there are only two kinds of results you have in this trade this kind of trading process is termed binary option. The binary options are very common in the forex and the interest rate business. The other names used to address the binary options are:
- All or nothing binary option
- Digital option
- Fixed return option (FRO)
For example, if you are making a purchase with a call binary option via the cash-or-nothing process. Consider you are trading for a strike price of $100 that has a binary payoff of $1000 for a particular period with a set expiry date, then:
- If the trade goes profitable above the proposed strike price before the expiry then you get the binary payoff of $1000.
- If the stock does not trade for the strike price and if it goes below the $100 proposed strike price you get nothing.
In the European Style of Binary option, the price fixed for the asset to be worthy of a call under binary options, which be the probable value the asset might strike after the expiry date.