Binary Put Option Explained.
The binary options trader buys a basic binary put option if he is bearish on the underlying in the very near term. This basic binary put option is also known as the common "High-Low" binary put option.
By purchasing a basic binary put option, the trader is simply speculating that the price of the underlying asset will be lower than the current market price when the option expires, typically within next few minutes or several hours.
It is entirely up to the trader how much he wishes to invest with each purchase of the binary put option. The minimum and maximum he can invest in each put option varies across brokerages.
Moneyness.
If the price of the underlying is below the strike price of the binary put option, the option expires in the money and the trader stands to receive a payout. Otherwise, the option expires out of the money and he loses his initial investment.
In the rare event where the price of the underlying asset is exactly the same as the strike price, the option expires at-the-money and the trader will simply get back his original investment.
Limited Profit.
If the binary put option expires in the money, the trader receives a profit which is equal to the payout% multiplied by the initial investment.
Limited Risk.
If the option expires out of the money, the trader loses his initial investment. This is also the maximum he can lose in this trade.
Binary Put Option Example.
A binary options brokerage is offering 85% payout for the binary put option on EUR/USD which is currently trading at $1.30.
After tracking the price movement of EUR/USD for the past hour, the binary option trader believes that the price will drop over the next 5 minutes and decides to invest $100 to purchase a binary call option on EUR/USD expiring in the next 5 minutes.
If EUR/USD goes down to $1.29 five minutes later, the investment pays off and the traders earns a profit of 85% of his initial investment, which is $85.
However, if the price of EUR/USD rises to say $1.31 instead, the trader will have lost his initial investment of $100.
Note that it does not matter whether the price of EUR/USD flash crashed below $1.00 or skyrocketed up to $1.40, both the profit and loss will be fixed at $85 and $100 respectively.
Binary Call Option.
If the binary options trader is bullish on the underlying price, he or she can buy a binary call option instead.
See Also.
Continue Reading.
What are the Main Types of Binary Options?
Learn how the One-Touch, No-Touch and Range/Boundary binary options differ from the common high-low viety and how to trade them. [Read on. ]
What Assets can be Traded using Binary Options?
Many of the most popular financial instruments such as currency pairs, equities and commodities are available to trade using binary options. . [Read on. ]
Binary Options: Trading or Gambling?
Is binary option a legitimate financial instrument or just another form of gambling. [Read on. ]
Binary Options & Trading Robots: A Perfect Match?
Unlike humans, robots have no emotion and do not need to rest, so they can make a lot more trades than humanly possible, combined with perfect consistency. [Read on. ]
Is Binary Options Trading a Scam?
Learn how you can get scammed when trading binary options if you are not careful. [Read on. ]
How to Select a Binary Options Broker?
With so many scam brokers out there, before you learn how to trade, one must know how to separate the wheat from the chaff and find a trustworthy binary options brokerage. [Read on. ]
Binary Options: Calculating Breakeven Win-Rate for a Given Payout.
How often does my trades need to be successful in order to be consistently profitable in the long run when trading binary options. [Read on. ]