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Binary option

Far from the barbarian idea that the term could evoke for you, a binary option is in fact a principle in finance that is relatively simple to understand. Having been in full “boom” for a dozen years, binary options are a type of vulgarized financial investment which won the appeal of specific traders wishing to exchange in the stock market for the purpose of realizing capital gains. This type of investment is generally conducted with brokers – or online brokers – specializing in the treatment of this type of options. You can notably consult the selection of the best binary option brokers online.

What is binary option?

Binary options are financial instruments that depend on the trading of an asset for a certain period of time. This concerns a type of contract where the payment amount of the gain is determined in advance in case of a gain, and where the amount is equal to zero in case of a loss. That is why we call this type of option “binary option“, because only two outcomes are possible after the contract matures. Either the contract ends “in the money”, and the holder receives the amount determined in advance, or the contract ends “out of money”, and the owner receives nothing.

The different instruments traded in binary option 

As explained here-above, binary options are a type of contract that applies to a financial asset. Therefore, we can trade binary options online on almost any type of financial value. We will discuss here the main marketable assets, widely offered by most online options brokers. Please note that you can find out the number of instruments available for each broker by consulting the comparison tables of binary options brokers.

The Forex

The Forex (foreign exchange contraction) represents the market of different currencies. This particularly volatile market sees the different exchange rates evolve over time. To place a binary option in the Forex market amounts to betting on the behaviour of the exchange rate of currency parities, such as the EUR / USD (the Euro against the dollar) for example.

The shares

The equities represent the shares of large publicly-traded companies. This can for example include Apple, Microsoft or Facebook.

The commodities

Raw materials are the resources extracted from earth. These notably include gold, silver and oil, which represent the three highly-demanded raw materials in binary options. One can also negotiate the different metals, gas and basic foods such as sugar or wheat.

Stock market indices 

Stock market indices – or index – are national financial values representing a country’s main companies. For example, one can cite the CAC40 (in France), the Dow Jones (in the United States of America) or the Footsie (in England.).

Online binary options: example of a transaction

Consider the example of a binary option placed on the EUR / USD exchange rate. The exchange rate – or trading – of the currency pair is currently at 1.3560 (which means that one euro currently trades against 1.3560 dollar). According to your analysis, the EUR / USD exchange rate is more likely to rise than fall. You then place a stake upwards.

If you decide to place € 100 upwards on the EUR / USD exchange rate, the yield offered by your broker is from 90% and the contract reaches maturity in 15 minutes.

Fifteen minutes later, the online contract ends. Thus, there are two possible outcomes:

The trading of the EUR / USD is now above 1.3560. Your stake proves to be a gain and thus you generate a gain of (rate of return multiplied by your investment) 90% * € 100 = € 90. Hence, the online broker pays you your original investment of € 100 in addition to your profit of € 90.

The exchange rate of EUR / USD is now below 1.3560. Your stake proves to be a loss and you acknowledge a loss of your invested € 100. Certain brokers also apply a return on a loss. If the broker applied a return on a loss of 15% on such transaction, you would recover (return on loss multiplied by your investment) 15% * € 100 = € 15. Thus, the broker pays you € 15.

In the (rare) case where the trading during the closing of your option is exactly the same as the one at the opening, your transaction is declared void and your initial investment is paid back to you.

The different types of binary options

There are several types of online binary options. The case mentioned here-above corresponds to the most commonly used option that is known as the “High / Low”. Let us analyse the three principal types of options offered by most online brokers:

High/Low

The principle of the most commonly-used option type is detailed in the above example. The High / Low option type consists of determining whether the underlying asset will be above or below the initial price at the time of maturity of the option.

For example: The exchange rate of the EUR / USD is initially 1.3550. The High / Low option allows you to decide if the exchange rate will be above the initial 1.3550 or below the initial 1.3550 at the maturity of your High / Low option.

One touch

The “touch” or “no touch” option type consists of determining whether the underlying asset will affect a previously-defined quotation or not.

For example: The exchange rate of the EUR / USD is initially 1.3550. The “touch” or “no touch” option allows you to determine whether the exchange rate will reach (and thus touch) the 1.3560 level at any moment throughout the duration of the option (in the case of the “touch” stake) or whether the course will not reach the 1.3560 level once throughout the duration of the option (in the case of a “no touch” stake).

Zone or “Boundary”

This type of option allows you to choose if the exchange rate of a financial asset will mature within a zone around the initial price, or outside of this zone.

For example: The exchange rate of the EUR / USD is initially 1.3550. The Zone or out of Zone option allows you to determine whether the exchange rate will range between 1.3545 and 1.3555 at the maturity (in the case of an “in Zone” stake) or whether the exchange rate will be below 1.3545 or above 1.3555 at the maturity (in the case of an “out of Zone” stake)

Binary option: the best online brokers 

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