A binary option is a simple yet extremely powerful short term investment. In the “world of grey areas” we call investing, the binary option is pure black and white. Whereas every other form of investment imaginable has considerable variability in every possible imaginable way, the binary option has fixed parameters – the only variable (once a contract is purchased) is the spot price of the underlying asset.
Folks looking for binary options explained in layman’s terms might not be satisfied with the above explanation, so I’ll try a more Earthy approach to my explanation. Imagine if you will a situation where you had two car dealers to choose from and were in the process of buying a car. At the first car dealership (Alpha Dealer), you could choose any make or model car. You could choose any color, any add-ons or accessories. You could choose to buy it or lease it. You could choose to pay for it in cash or take out a loan (from whatever bank you chose). The list of potential choices goes on and on at the first car dealership.
Not So Many Choices at the Binary Option Dealership
At the second dealership (the binary option dealership) you can choose to buy from only the top ten most popular model cars from around the world. You can only buy the cars exactly off the shelf – each car from the selection of cars of a given make and model are exactly the same except in one respect. In other words if one of the cars available on the Binary Option car lot is a Honda Accord and there are 100 Accords on the lot to choose from, each Accord will be exactly alike but for one respect: you can choose a red Accord or a green one.
At the Binary Option Broker Dealership, You Can Choose Green or Red
Paying for the New Car at the Binary Option Dealer Is Straightforward Too: Cash Only
So you decided to buy a green Accord from the selection of Honda Accords at the Binary Option dealer and you head into the office to finish up the paperwork to purchase the car. When you get to the office however, rather than the stacks and stacks of forms you are normally accustomed to dealing with at the Alpha Dealer, you see a single slip of paper – a bill of sale sitting next to a cash register. Rather than sign a bunch of forms with loan paperwork and terms and legalese and interest rates, you pull out a wad of cash and plonk it down on the counter. The clerk hands you your keys and you drive off the lot in your green Accord.
The Analogy Doesn’t Stop There Though
New cars in the real world (Alpha Dealer) have varying levels of quality and reliability: some run for years, others quit at the end of the month. Not so at the Binary Option car dealership. The cars from the Binary Option Dealership are brought back to the lot at the end of the day. Sometimes the car appreciates in value 70%. Sometimes the car comes back to the lot dead, rusted, and worthless. Sometime the car comes back at the exact same price. Whatever the outcome of the value of the car at the Binary Option Dealer – the car MUST be returned at the end of the day and disposed of.
In a Nutshell – What Is A Binary Option:
- Is paid for in cash
- Has a fixed lifespan (one hour or one day)
- Has two selections to choose from on each stock (car): Put or Call
- Has a limited number of only the most popular brand name stocks/indices/currencies (makes and models) from which to choose
- The price by which the ending value of the option will be compared (called the strike price) is the current value of the stock at the very instant of purchase of the option
- The terms of the payout on Expiration (think almost like “Trade in value”) are set at the instant of purchase of the Binary Option
- When the life of the binary option (car) expires the current value of the stock (the price at expiration – or the Expiration price) is compared to the original price of the stock at the time of the purchase of the binary option. Depending on where the Strike price and Expiration prices fall the ending value of the binary option is computed accordingly and paid out.
Hopefully This Made Sense to You
No doubt it may seem counter intuitive that a binary option is in reality very simple. We live in a world surrounded by choices of every possible kind. The beauty and simplicity of the binary option is that the choices are extremely limited. Why is that important? The black and white nature of binary options allows the astute trader to use a binary option in combination with other (more variable) assets to create “pinching” situations. Think of it in terms of “If situation A happens, I get this result…” (a desired outcome) “…while if the polar opposite situation happens (situation B), I get a different result – but it is still desirable.”
In a world of endless variables, pincher trades are very difficult to setup – if not outright impossible. The addition of a “true/false” element (a Binary Option) to a trade makes pincher trades (positive outcomes regardless of the impact of variables) much easier to accomplish.