A binary option is a type of option where the payment is an amount determined in advance or anything. Thus it is called "binary options" because only two outcomes are possible at maturity of the option ends "in the money" and the holder receives the amount determined under either option ends "out of the money "and the holder receives nothing. This type of option involved in the installation of structured products but is also very popular with investors.
Example of binary options trading
A trader who thinks that the EUR / USD will close at a level above the current price of 1.3250 can buy a binary option to increase (or call) to enjoy this issue. Unlike a trader who thinks that the EUR / USD will finish below the level of 1.3250 can buy a binary option down (or put).
At 14 h while the EUR / USD is 1.3250 the trader buys a binary option rising to € 100. The option expires at 15 pm and provides a yield of 80% if the price ends above the exercise price. And 15 h, if the EUR / USD is above 1.3250 the holder receives the amount invested (€ 100) more than 80% of his bonus is € 80. The profit is 80 €. Conversely, if the price ends below 1.3250 then the trader loses his investment.
Image 1: Profile result of a buyer of a call binary prime p, exercise price K and flow set Q
Image 2: Profile result of a buyer of a put binary prime p, exercise price K and flow set Q
Under certain conditions, it is possible for the holder of the option to sell it before maturity. In this case, the redemption price of the option is determined by the difference between the current price and the strike price of the underlying.
price of a binary option
The price of a binary option is mainly determined through the assessment model of Black-Scholes options. This model determines the price of an option, then the issuer of the option determines the purchase price and the selling price. For an option, the trader must pay a certain amount to expect to receive the expected payoff at maturity of the option. Also, many brokers offer to negotiate binary options not explicitly determining the purchase price of the option but announcing a potential gain if the option finishes in the money.
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