What are binary options?
Within the derivatives market, among financial instruments like futures contracts, we find the derivative options industry where trading indirectly formed around key types of assets…
Within derivative options, we see vanilla options, exotic options, combinations, options spreads and various forms of valuation of such options.
A vanilla option is any option that is not exotic. We’re not so concerned with vanilla options on this website. An exotic option can be any of a broad range of options that may include complex financial structures. Binary options are exotic options, as are Asian options, Barrier options and various other forms of financial derivative options.
Combinations are options trading strategies involving the taking of positions in both calls and puts on the same underlying (like betting on both sides of the fence in a football match). Types of combinations include Collar, Fence, Iron Butterfly, Iron Condor, Straddle, Strangle, Covered Call, Protective Put and Risk Reversal, and as you might imagine, they’re all subtle variations of the same basic strategy – an attempt to guarantee success by betting both for and against the increased value of an asset at the same time.
Option spreads are the basic building blocks of binary options trading strategies. A spread position is entered by buying and selling equal number of options of the same class on the same underlying security but with different strike prices or expiration dates.
Now that you’re all clued up on the basics of the industry, let’s look deeper into Binary Options.