Binary Options Terms

Trading binary options can be very profitable, but it is also a specialized market which has its own lexicon. If you want to trade binary options, here is a guide to the terms you will need to know.

Similar to many other markets, Binary Options require you to learn various terms and phrases, some of which may confuse new investors.

Even experienced brokers sometimes have trouble understanding industry terms correctly. It could be a disaster if a person invested money in something they did not comprehend thoroughly.

With the aim to help traders become more familiar and confident, this article provides a collection of many commonly used Binary Options’ terms (A-Z sorted) with what they mean.

Let’s go for a quick walk through these terms, so you can work toward becoming a Binary Options expert.

American style option

An option contract that allows the contract holder to activate their right (for buying or selling) at any time until the date of expiration.

Arbitrage

A trade in which an asset is purchased from one market and sold to another market at the same time. Profit is gained from price difference between the two markets.

Ask price

The lowest price you can obtain on the market (aka “offer price”).

At the money (ATM)

An option in which the strike price is precisely equal to the fundamental market price (no gaining or losing losing money at that point, you are just paying for time and volatility).

Bear spread

An option strategy that is used when the investors expect an asset's price to go down, and hope to gain from that fall. On the contrary, this strategy will create a loss if the price goes up.

Beta

An indicator that measures stocks’ price action in comparison with the general market, it is based on past statistical analysis.

Bid price

The highest price you can sell to in the market.

Bid/Ask spread

Refers to the discrepancy between the ask price and bid price, which reflects the expected profit of the option contract as well as stock volatility. The smaller the bid/ask spread is, the more liquid it is, and the more likely it is to offer liquidity.

Binary options

Options with 2 possible outcomes: by the expiration date, investors may get a fixed amount of money or nothing in return.

Break even point

Indicates when strike price and prevailing price are equal, which means no profit or loss.

Bullish trading strategy

A trading strategy that is applied when the underlying price is expected to increase.

Buy to open

A situation in which option purchasers place new opening options, they can be call options or put options.

Call option

An option contract that allows the buyer to choose to buy an asset at a specific price during a specific range of time. In most cases the option holder has the right, but not the obligation to buy the asset.

Cash settlement

Payments for a option contract that ends in the money are made in cash, and there is no transfer of stocks, bonds, or other instruments.

Close

The time at which trading stops for the day.

Contract size

The quantity of financial instruments that are covered by an option contract.

Contract neutral hedging

A strategy that hedges shares, or other financial instruments by covering them with options. The goal is to ensure that there is little variation in the value of the asset.

Day trader

Refers to traders who trade on a very short term basis, and rarely leave a position open over night.

Delta

The change in options price compared with corresponding price change of prevailing stocks on the market. Deltas have positive values in call options and negative values in put options.

Delta neutral

Refers to a strategy which uses a combination of positive and negative delta positions that offset each other. As the result, the value will remain unchanged no matter how much stock price fluctuates.

Derivatives

Value of a derivative is defined based upon the price or value of another underlying asset. Option contract and future contract are two typical types of derivatives.

Exercise

To perform actions that are regulated by terms in option contracts. For a put option, holders exercise selling actions, while in call option, holders exercise buying actions.

Exercise price

The price that option holders have to pay in order to use their options. For example, a put options holder would have to pay the exercise price to settle the contract, and make a profit.

Expiration date

Option contracts become invalid after this day.

Expiration time

Precise moment at which an option contract is no longer valid.

Expire worthless

When an option is out of the money, it will expire with no value. That option will no longer be present in your account.

Extrinsic value

Calculated by subtracting intrinsic value from total option value.

Financial instruments

Any type of assets that carries monetary value and exists under a contract agreement (either physical or electric form, e.g. cash, bond, stock, gold etc.). The markets are based in creating, trading, and modifying these instruments.

Gamma

The change in delta of an option in comparison with one price unit change of underlying security.

Greeks

A set of indicators to measure influences on options’ prices.

Hedging

Refers to a technique or process in binary options, which aims to eliminate the risk of loss.

Index future

A future contract in which a stock index in future’s market is nominated as the underlying asset.

Inflation

The percentage of that prices rise over time. A large number of economic goods and services are used to determine this metric.

Initial margin requirement

The least amount of money in a trading account required to take on positions.

Initial Public Offering (IPO)

The first time a private company offers their stock publicly to the markets for trading.

In the money option

A situation in which the discrepancy between an option's strike price and the prevailing market price of a financial instrument show the potential for profit in the future (in other words, that option has intrinsic value). In practical terms, this occurs when a put option has the strike price that is above the prevailing market price, or when a call option has a strike price under prevailing market price.

Intrinsic value

Intrinsic value reflects option’s expected value at current moment and current underlying stock price.

Lagging indicators

Secondary measurable factors which are adjusted following changes in the economy’s growth.

Last trading day

The final day holders are allowed to carry out trades of their contracts on the market. After that date, holders have to deliver or accept all asset/cash settlement for unclosed options.

Leading indicators

Factors which are measured and predicted prior to the actual changes in the economy.

Leverage

A method to multiply profit as well as risk by utilizing loans to buy more financial instruments.

Long

Refers to a holder placing a buy position when he assumes the stock price may increase.

Margin

The amount of cash to be deposited in a trader’s account in order to maintain his open positions.

Offer price

The other side of the ask price in a market.

Option

One type of derivative, which allows traders and investors to obtain the right (but not obligation) to sell (with put options) or buy (with call options) a certain quantity of assets at a specific price and in a specific amount of time.

Option writer

Option holders who can transfer the right over their option contract to buyers at a fixed future price in order to gain some fee. In exchange, option writers commit to deliver either securities or cash in the future, if the option has value at the date of expiration.

Out of the money option

The opposite of an in the money option. Out the money options have no intrinsic value. Holders will not exercise the option at current market price because it has no value.

Portfolio

A list of investments.

Put option

An option contract that gives holders non-obligatory right to sell prevailing assets at a predetermined price during a given amount of time.

Real time

A real time price reflects the most recent ask and bid prices, which automatically refreshes every few seconds.

Resistance level

A peak at which stock prices cease going up.

Short

Describes selling a financial instrument that the sellers believes will fall in value.

Spot market

Where financial instruments’ transactions are carried out immediately in exchange for cash.

Spread

The discrepancy between offer price and bid price of a financial asset.

Stop loss order

When a trader performs a transaction to sell or buy in order to prevent their loss from escalating.

Stop order

An order (sell/buy) that will take place as soon as a price reaches a specific level.

Straddle

An option strategy in which a number of put and call options of one underlying asset are processed at the same time. The puts and calls have the same terms, base currency, expiration date, and strike price at break even point.

Strangle

Similar to straddle, a strangle contains simultaneous put and call options of only one asset with the same expiration date, but at different strike price levels.

Strike price

A predetermined price given in option contracts that will be used when exercising an option.

Support level

The line at which a given financial instrument's price may not fall further in the near-term.

Technical analysis

A set of methods to create graphs and forecast a market tendencies by collecting and observing past statistics.

Trading range

The difference between the peak and bottom trading price of an instrument in a given time frame.

Underlying stock

The financial instruments which are basis of derivative trading.

Volatility

How responsive a security is to market fluctuations.

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