Binary Call Option Explained

The binary options trader buys a basic binary call option if he is bullish on the underlying in the very near term. This basic binary call option is also known as the common "High-Low" binary call option.

By purchasing a basic binary call option, the trader is simply speculating that the price of the underlying asset will be higher 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 call option. The minimum and maximum he can put in with each call option varies across brokerages.

Moneyness

If the price of the underlying is above the strike price of the binary call 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 call 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 Call Option Payoff Diagram
Graph showing the expected profit or loss for the binary call option strategy in relation to the market price of the underlying security on option expiration date.

Binary Call Option Example

A binary options brokerage is offering 85% payout for the binary call 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 rise 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 up to say $1.31 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 drops down to say $1.29 instead, the trader will have lost his initial investment of $100.

Note that it does not matter whether the price of EUR/USD skyrocketed up to $1.40 or flash crashed below $1.00, both the profit and loss will be fixed at $85 and $100 respectively.

Binary Put Option

If the binary options trader is bearish on the price, he or she can buy a binary put option instead.



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