What does Expiration mean when trading Binary Options

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What does Expiration mean when trading Binary Options?

The nature of Binary Options Trading: Binary Options Trading takes a less cluttered approach to trading popular assets like stocks and currency pairs. Although there are different trade types, the rules are simple for each.

For high/low options for example, the rule is to make correctly predict the future movement of an asset relative to the price at which you take a position, at the expiry of a set timeframe. With this Binary Options trade type, it does not matter how long your hold the position nor the number of times the asset price moves in opposing directions. The emphasis is on: When the timeframe expired, was the price of the asset higher or lower compared to the base price?

On the other hand, for the touch and boundary options, the rule is similarly simple. A trader predicts that the price of an asset will reach a certain price point within a certain timeframe. With this options type, it doesn’t matter how many times the price nearly hit the predicted price point, nor does it matter how many times the price hit the predicted price point, nor what happened to the price after it had hit the price point. The emphasis is on; did the asset price reach the predicted price point at least once before the position expired?

Glaringly, one factor is common between both common Binary Options types—TIME.

What is Expiration in Binary Options?

Expiration is the concept that describes the termination of the terms of a contract or position after a set time has elapsed.

What are the Expiry Times in Binary Options?

Because of the fast-paced nature of Binary Options, expiry times are generally short. They may be as short as 30 seconds or as high as a whole day. However, the expiry times offered differs across brokers.

This notwithstanding, most brokers offer the following expiry times after which expiration occurs, 60 seconds, 5 minutes, 15 minutes, and 30 minutes. Different brokers offer variety in the form of non-standard expiry times like 30 seconds, 120 seconds, 60 minutes (1 hour) et cetera.

Which Expiry Times should you use?

The three core reasons that determine which expiry time you use are:

  • Option Type ( for example, high/low or touch option)
  • Strategy
  • Payout

Making an Early Exit before Expiration in Binary Options

Binary Options brokers are increasingly supporting the feature that permits traders to exit a trade (close a position) before expiration. This action is referred to as closing early, and may be brought about by using “Close Now” tool in a broker’s summarily list of platform tool.

This feature is vital to traders, especially when the outlook is poor. The requirements and nature of this feature differs across brokers. Notably, the payout is affected as brokers usually offer lower payouts or worse zero payout for closing early depending on the amount time left to expiration and the relationship between the current price and strike price.

Binary Option

What is a Binary Option?

A binary option is a financial product where the buyer receives a payout or loses their investment, based on if the option expires in the money. Binary options depend on the outcome of a “yes or no” proposition, hence the name “binary.” Binary options have an expiry date and/or time. At the time of expiry, the price of the underlying asset must be on the correct side of the strike price (based on the trade taken) for the trader to make a profit.

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A binary option automatically exercises, meaning the gain or loss on the trade is automatically credited or debited to the trader’s account when the option expires.

Binary Options Outside the US

Basics of a Binary Option

A binary option may be as simple as whether the share price of ABC will be above $25 on April 22, 2020, at 10:45 a.m. The trader makes a decision, either yes (it will be higher) or no (it will be lower).

Let’s say the trader thinks the price will be trading above $25, on that date and time, and is willing to bet $100 on it. If ABC shares trade above $25 at that date and time, the trader receives a payout per the terms agreed. For example, if the payout was 70%, the binary broker credits the trader’s account with $70.

If the price trades below $25 at that date and time, the trader was wrong and loses their $100 investment in the trade.

Key Takeaways

  • Binary options depend on the outcome of a “yes or no” proposition.
  • Traders receive a payout if the binary option expires in the money and incur a loss if it expires out of the money.
  • Binary options set a fixed payout and loss amount.
  • Binary options don’t allow traders to take a position in the underlying security.
  • Most binary options trading occurs outside the United States.

Difference Between Binary and Vanilla Options

A vanilla American option gives the holder the right to buy or sell an underlying asset at a specified price before the expiration date of the option. A European option is the same, except traders can only exercise that right on the expiration date. Vanilla options, or just “options,” provide the buyer with potential ownership of the underlying asset. When buying these options, traders have fixed risk, but profits vary depending on how far the price of the underlying asset moves.

Binary options differ in that they don’t provide the possibility of taking a position in the underlying asset. Binary options typically specify a fixed maximum payout, while maximum risk is limited to the amount invested in the option. Movement in the underlying asset doesn’t affect the payout received or loss incurred.

The profit or loss depends on whether the price of the underlying is on the correct side of the strike price. Some binary options can be closed before expiration, although this typically reduces the payout received (if the option is in the money).

Binary Options and Regulation

Binary options occasionally trade on platforms regulated by the Securities and Exchange Commission (SEC) and other regulatory agencies, but most binary options trading occurs outside the United States and may not be regulated. Unregulated binary options brokers don’t have to meet a particular standard; therefore, investors should be wary of the potential for fraud. Conversely, vanilla options trade on regulated U.S. exchanges and are subject to greater oversight.

Real World Binary Options Example

Nadex is a regulated binary options exchange in the United States. Nadex binary options are based on a “yes or no” proposition and allow traders to exit before expiry. The binary option’s entry price indicates the potential profit or loss, with all options expiring worth $100 or $0.

Let’s assume stock Colgate-Palmolive Co. (CL) is currently trading at $64.75. A binary option has a strike price of $65 and expires tomorrow at 12 p.m. The trader can buy the option for $40. If the price of the stock finishes above $65, the option expires in the money and is worth $100. The trader makes $60 ($100 – $40).

If the option expires and the price of the Colgate is below $65 (out of the money), the trader loses the $40 they put into the option. The potential profit and loss, combined, always equals $100 with a Nadex binary option.

If the trader wanted to make a more significant investment, he or she could change the number of options traded. For example, selecting three contracts, in this case, would up the risk to $120, and increase the profit potential to $180.

Non-Nadex binary options are similar, except they typically aren’t regulated in the United States, often can’t be exited before expiry, usually have fixed percentage payout for wins (whereas Nadex payouts fluctuate based on the price paid for the option) and may not trade in $100 increments.

What does expiration mean when trading binary options

Written by on March 12, 2020

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