If you want to start binary options trading it is absolutely necessary to first get used to the trading language. Fortunately, the terminology is very easy to learn. We have compiled a short overview about the most important binary options and trading terms:
Trading Terms
ITM – “In-The-Money” – If your market trend prognosis comes true the option is “in-the-money”. For example: Gold is trading at $1500 an ounce and you buy a call binary gold option. If the gold price rises above $1500 your derivative is “in-the-money”. However, ITM doesn’t necessarily mean profit. The option has to be ITM at expiration to make a profit.
OTM – “Out-of-The-Money” – If your market trend prognosis does not come true the option is “out-of-the-money”. For example: “Facebook” is trading at $23.30 and you buy a “Facebook” binary call option. If the stock price goes down your option is OTM and you will loose your bet if the stock price is still below $23.30 at expiration.
Expiry Time/Expiration – The time and date when an option expires. Many brokers offer the early exercise of their options so you can lock in profits. Therefore, it’s very important to know the exact expiry time to make the best decision – especially in volatile markets.
Asset – An asset is the underlying instrument used to determine a contract: currencies, commodities, stocks or indices. When trading binary options you don’t buy or sell the asset itself. You actually bet on the price development of the underlying asset.
Payout – The profit realized for an ‘in-the-money’ option expiry. The payout is up to 90% depending on the broker you are trading with and depending on the underlying asset.
“Loss Protection”/Refund – The amount refunded to the trader if an option expires OTM. This is a kind of “loss protection” and is not offered by every brokerage company.
More Terms
Broker – To buy or sell binary options, you need a binary options broker. The broker provides you with a special online platform designed for binary options trading.
Binary (Digital) Options – A binary option, sometimes referred to as a digital option, is an exotic option that offers a fixed return. In mathematics jargon, a binary number is one which is given a value of either 0 or 1 from which the name is derived. Based on whether or not the option expires in the money the investor makes profit or loses his bet. The return is predetermined by contract.
