What are the characteristics of binary options? Investments in the capital market and in derivative instruments are often compared to the act of gambling in a casino, due to the high degree of uncertainty involved. If we talk about comparisons with games, binary options would be the equivalent of tossing a coin and betting on heads or tails.
Let’s first remember the definition of an option, which is a financial contract that gives its holder the right, but not the obligation, to acquire or sell a certain asset, known as an underlying asset, at a price and on a date agreed in advance. .
Binary options are a bit different, since they do not acquire the right to buy or sell, but rather to receive a profitability agreed in advance if the price of the underlying asset is above or below what is established. In other words, a bet.
Features of binary options
Binary options are so called because they seem to have been designed by a computer engineer, in which there is only the possibility of winning (number 1 or positive), or losing (number 0 or negative). Hence, they are also known as bet options or all or nothing options.
Other binary options features is that its maturity is in very short terms, unlike other derivative instruments, which are usually agreed for the medium term. It is very common that options of this type are made with terms of hours or days, the exception being those that are agreed for weeks or months.
The underlying asset in a binary option can be any of those that are common in traditional options. They can be done on commodity prices such as oil or gold, on currency pairs, on specific stocks or on stock indices like the S&P 500.
Features of binary options:Types and remuneration of binary options
The binary options they can be of the call or put type. In the former, an attempt is made to predict that the price of the underlying asset at the time of expiration of the option will be above what it had when it was agreed, while in the latter, it is betting on a decline in the price at the time of closing. with respect to the one presented when it was made.
If the forecasts made by the investor are met, the option is said to have ended In the money, which gives you the right to recover your investment plus a previously agreed percentage. If the forecasts are not met, then it is said that it closed Out of Money and the investor loses everything, or almost everything, because some brokers grant a percentage of the initial investment as compensation.
Let’s look at an example. An investor believes that the price of oil will increase in the next two hours, so he contracts a binary call option for 100 USD with a return of 70%. If after two hours the price has increased, this person receives 170 USD; if, on the contrary, the price has decreased, the investor loses everything, or will recover the percentage of the investment that has been agreed with the broker.