Whats is Binary Options

BINARY OPTIONS

In the field of finance, a binary option is a type of option whose payoff is either some fixed amount of some asset or nothing at all. The two main types of options are cash-or-nothing and asset-or-nothing. The binary option cash-or-nothing pays a certain amount of cash if the option expiration the value quoted above what I paid "in-the-money", not being received nothing otherwise (out-the-money). Therefore, the options are binary in nature because there are only two possible outcomes. Also known as all-or-nothing options (more common in forex / interest rate markets) digital options, fixed income and options (FRO) (on the American Stock Exchange). 

When buying a binary option the potential return it offers is known before making the purchase. Binary options can be purchased at almost any financial product and can be purchased in both directions of trade either by buying a "Call" / "Buy" or buying a "For Sale" "Put" option. This means that an investor can go long or short in any financial product simply by buying a binary option. Binary options are offered against a fixed maturity time, which may be for example, 60 seconds and a maximum of 30 minutes, one hour before or at the close of the trading day. For example, purchasing an option when Banco Santander is trading at €6, if in the future the maturity date of the stock is trading above the price you bought the asset receive the benefit offered, if the stock is trading below € 6, nothing is received. 

In the Black-Scholes model, the value of a digital option can be expressed in terms of the cumulative normal distribution function. Due to the difficulty in coverage of binary options that are close to expiring, which are much less commercialized options "vanilla" but can be approximated with vertical margins.

Binary Options not traded on the stock exchange

Binary option contracts have been available over-the-counter (OTC), ie sold directly by the issuer to the purchaser. These were considered "exotic instruments," and there was no liquid market for trading these instruments between their issuance and expiration. You see them often embedded in more complex options contracts. 

Since the mid 2008's websites called binary options trading platform binary options have been offering a simplified version of binary exchange-traded options. It is estimated that about 90 of these platforms (including private label products) have been in operation since January 2012, and offer options in some 125 underlying assets. The binary options platforms provide standardized short-term loss of predetermined benefits, which can not be settled (purchase or sale closing) before expiry.

Business Model

The platforms do not charge fees for their investors. Their profit comes from the difference between the options expire in the money "in-the-money" options front expire "out of the money" (out-the-money). This difference can be found by the following formula. In this (for each asset base with the same characteristics of life), (W) is money in the payment option as a percentage (eg, 1.7), (L) is the payment option money in terms of percentage (eg, 0.15), (V_ {1}) (V_ {2}) are the volumes of business transactions for each outcome (eg, $ 1,000), (S) is an enlargement of the platform. 

  S = - [V_ {1} (W-1) + V_ {2} (L-1)] 

In this example, the turnover of the platform is $ 2,000 and your profit is $ 150 or 7.5% of turnover. As the gain of the platform is of the above formula, the most platforms will be irrelevant to the result of a single operation. Note that if V_ {1} is not equal to V_ {2} then the platform will have to act as a market maker. This may cause the increase of (S) platform to be more volatile than in the previous formula. For a trader to make a profit in the long term you have to correctly predict about 54.5% of the time (depending on the in-the-money and out-of-the money paid).