A binary option, or asset-or-nothing option, is type of option where the payoff is organized to be either a fixed amount of reimbursement if the option runs out in the money, or almost nothing if the option expires out from the money. The success of a binary option is thus depending on a yes or no proposition, hence “binary”. A binary option automatically exercises, meaning the option holder does not choose to buy or sell the underlying asset.
Traders may find binary options attractive because of their apparent simplicity, especially since the investor must essentially only guess whether something specific will or will not likely happen. For example, a binary option may be as easy as whether the share price of a company will be above $25. If the companies reveal price is $27 at the appointed time, the choice automatically exercises and the choice holder gets a pre-specified amount of cash.
Examples of Binary Options in Action
A buyer is bullish and feels that the value of Coca Cola, at 49.50, is a low valuation of Coca Cola. He purchases a Binary Option, hedging that the stock will be worth 50.00 at the closing bell. If the Binary Option is correct, you make 0.50. The larger the gamble, the more the potential pay off.
This is largely influenced by knowing a stocks true value. The market is currently trending high (As of August 12th) and all experts agree the market is over inflated based on the fact the productivity does not justify most stock prices. The market will correct, and when it does betting against the market will make you a lot of money.
This is what trading Binary Options is all about. Knowing the value of the market, and predicting where it will go. a smart financial advisor can make a lo of money with this approach.