Binary options is the name of instruments that offer just two outcomes.
- Is the price of gold going to be above $XXXX, or not?
- Is the USD/JPY price going to be below $XXX.XX, or not?
- Is BTC going to be between $10,000 and $100,000, or not?
- Will the price of oil hit $XXX, or not
Clearly there is a vast array of different binary options possible within the vanilla calls and puts. But on combining the calls and puts one starts the process of creating ‘structured products’.
The fourth bullet point above introduces the concept of ‘touch’ options whereby the price of an asset only has to touch (or trade through) a predefined price level for the option to win or lose. Yet ‘touch’ options are not confined to just one predefined price level, there is the possibility of two predefined price levels also, e.g. double no-touch options.
These single strike touch options can then be combined with the vanilla options or other touch options to create knock-in binary options.
And, of course, the single strike touch options does not necessarily need to be a knock-in option but could be a knock out option, hence a down-and-out binary call option. In this instance there would be a price level below the current asset price which, on being hit, the underlying binary call option gets knocked out.
Furthermore, one can have two asset binary options whereby the price of, say, gold has to be above or below a predefined price as well as the price of, say, oil being above or below another predefined price.
Unfortunately the more ignorant financial regulators believe binary options to be quite simply a vanilla call or put where the target price is always the current price of the asset. These are referred to as ‘Over’ and ‘Under’ options. They are by far the most simple of financial instruments ever invented since all the trader has to do is simply forecast that the asset price will be higher or lower than the current asset price at some specific time in the, usually, very near future.
This site’s mission is to educate traders, regulators, financial engineers and the media as to what binary options really are and to dispel the notion that these instruments are the devil’s own making. They are no more dangerous than putting your money on red or black on a Las Vegas roulette table, betting on a horse at Rose Hill, or backing Manchester United to beat Liverpool FC..