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.