One of the things that a digital option trader or investor trading in binary options contracts must be able to do is to understand the terms and lingo used in the market. These are things that the binary options investor will encounter on his trading platform, on stock and commodity review sites as well as binary options content websites.
In this piece, we bring to the trader the common binary options terms which will be commonly encountered so that when the investor is trading on assets in the market, it will be easy to make sense of some of the technical/fundamental analysis displayed on the trading platforms and other places.
At-the-money: A situation where the strike price and market price of the instrument on expiry are equal. This is sometimes seen in the 60 second option trade.
Binary Options: A type of financial trading where the trader receives a fixed amount for correctly predicting where an asset will end when the trade expires. A wrong prediction will lead to a loss of the invested capital.
Expiry: This is the time or date on which the lifespan of the open binary options trade comes to an end. The time frame could be from as low as 30 seconds to as much as one year. Traders can sometimes set the time limit on their trades, or they have to choose from the time limits set by the broker.
In-the-money: This refers to a situation where the trader’s expectation for the trade is attained, thereby leading to a realization of profit. For a Call option, the trader is in-the-money if the asset is above the strike price. For a Put option, the trader is in-the-money if the price is below the strike.
Out-of-the-money: This refers to a situation where the trader’s expectation for the trade is not attained, thereby leading to a loss. For a Call option, the trader is out-of-the-money if the asset is below the strike price. For a Put option, the investor is out-of-the-money if the price is above the strike.
Payout: This is the sum of the trading profit realized from a fixed odds option PLUS the initial invested amount. The payout is determined by several factors. On some platforms, the use of early closure to end the trade before expiry leads to a reduced payout on the digital option.
Stock: This represents a unit of ownership of a company, and the change in value is usually traded either on a market’s exchange or on the options market.
Stock Index: An index is a collection of a basket of stocks that are traded on a particular exchange and priced into one tradable underlying instrument, which changes value on a day to day basis as a reflection of the change in value of the component stocks. An index could be a sectorial index or a national index.
Strike: This is the price at which a digital option is purchased or sold, or exercised.
Tick: This is the smallest unit of measurement of the movement of an asset’s value. The trading tick value differs from one instrument to another.
Underlying asset: This refers to the financial instrument that a trader can trade a binary option on. The attainment of the strike by the underlying asset as well as the methodology by which the strike price is attained forms the basis of the outcome of the trade. There are four categories of underlying assets in binary options: stocks, currencies (forex), stock index and commodity assets.
These are the most basic trading terminologies that every fixed odds options investor will encounter in the market. This is not an exhaustive list, but a working knowledge of these terms will suffice and lead to a better trading experience.