Binary Options Examples

With binary options trading, investors speculate on the price movement of an asset, for example a FTSE-listed stock, by selecting a yes or no outcome. There are a variety of contract types with different benefits and drawbacks. This guide will walk through several binary options examples to help beginners find the right product for their financial goals.

How Binary Options Work

Binary options trading is sometimes known as financial market “betting” because the returns of each trade are fixed and the brokers can be compared to “bookies.” Binary options are available on most asset classes such as stocks, indices, cryptocurrencies, commodities and forex. Before purchasing the contract, the online broker and the trader agree on the conditions of the trade. These typically include:

• Option Premium: This is the cost of the contract that the broker charges to the trader. Option premiums will vary based on the asset in question and the broker you are using. High premiums will have an impact on profits and payouts.
• Expiration Time and Date: Before entering the market, the broker and trader will agree on the expiration time and date. Binary options time frames can range can from 30 seconds to several days and even weeks. The expiration time will be an important factor in determining the success of your trade.
• Payout: A binary options payout is the gain received by the trader if they are correct and their trade expires “in the money.” Payouts are usually a percentage of the premium paid by the trader, for example, 70%. The return can vary depending on the broker’s rates and the likelihood of the trade expiring in the money. If the trade is likely to be successful, the payout percentage is often lower than with riskier trades.

Pocket Option Trade Example

In most binary options contracts, there are only two potential outcomes; expiring in the money or expiring out of the money. Unlike other trading types, there is no potential for exponential growth, even if the value of the asset soars. Expected costs and profits are always pre-defined before the trade is opened.

Importantly, if the trader believes that the price of an asset is going to increase, they should buy a call option. Conversely, if the trader believes that the price of the asset will fall, they should buy a put option.

Binary Options Examples

There are a variety of binary options products available. Before risking capital, investors should understand how each type of contract works…

High/Low

First on our list of binary options examples is the “high/low”, also known as “up/down” or “over/under”. This type of contract is the most popular. Traders simply bet on whether at a specific point in the future (on the expiry date), an asset’s price will increase or decrease in value compared to its current price. If they believe the price will go up, they buy a call, if they believe the price will go down, they buy a put.

Example

Following some market research, a trader believes that the BT share price is going to decrease the morning after the announcement of the firm’s financial results. BT closed at £180.00 but the trader believes within 30 minutes of the London Stock Exchange (LSE) opening, the price will fall by around 4%.

A £100 trade is entered with a strike price of £172.00 and an expiry time of 8:30 am. Since the trader expects the price to go down from the current trading price, they buy a put. The broker offers the trader a payout of 60%.

When the market opens at 8:00 am the price momently reaches £190.00. However, by 8:30 am BT is trading at £170.00. Since the binary option has expired with a price lower than was stipulated in the contract (£172.00), the trade finishes in the money and the trader receives a £60 payout (60% of their £100 premium).

Touch/No Touch

Next on our list of binary options examples is the “one-touch”. This type of product is fairly self-explanatory. The trader speculates that an asset will touch (either reach or fall) a specific price point before the binary options contract expires. If the asset does hit the target price before the expiration date, then the position is cashed out immediately.

No touch binary options operate in the same way: the trader bets that an asset won’t reach a pre-determined price during the specified period.

Example

A different trader using the same information from the previous example regarding the BT financial results announcement anticipates that the market will react positively to the news initially. However, the trader isn’t certain when exactly this will happen. Therefore, the traders invest £100 in a handful of call binary options at £190.00 with an expiry time of 8:30 am.

Importantly, the trader buys touch options and not high/low options. This means that the price agreed in this type of contract just needs to be achieved within the contract time frame, but it doesn’t need to expire at that price.

Therefore, when the market opens and the price hits £190.00, the trader’s position is automatically cashed out and they receive a payout from the broker. If the price had peaked at £189.99 and didn’t go above this before the expiration time, the trade would not have expired in the money and the investor’s premium would be lost.

Boundary/Range

With boundary/range binary options, the trader is betting that an asset’s price will either land in between or outside of two price points. The range between the lower and the upper price is known as the boundary. The trader and the broker must agree on the prices at both ends of the range, and these prices are typically above and below the asset’s current trading price.

Example

Boundary options contracts can be effective when an investor is trying to trade on the volatility of an asset. Financial announcements, news stories and the latest legislation can trigger a period of volatility in the market. Using the previous example, if BT is currently trading at £180.00, a trader could enter a range option with an upper boundary of £185.00 and a lower boundary of £175.00. If the trader believes at 8:30 am the price will be within this range, then they are expecting low volatility. This is because the upper and lower brackets are within 3% of the current trading price.

However, if they are anticipating the market to react significantly and for the price to swing, then they may trade outside of boundaries. For example, a trader buys £100 worth of boundary options contracts which stipulate that they believe at 8:30 am BT will be trading outside of the £175.00 and £185.00 bracket. If the asset’s price expires outside of these boundaries, they will receive a payout.

At 8:30 am BT is trading at £170.00, and the trader wins the bet.

Ladder

Last on our list of binary options examples is the “ladder”. Typical binary options offer one payout depending on whether the trade lands in or out of the money. Ladder binary options, however, can offer many different payouts depending on where the price lands when the options expire.

Essentially, ladder options are normally three or four high/low binary options grouped together. Each option will offer a different payout depending on how high or low the price of an asset goes. At the extremes of the ladder, the payouts are significantly larger.

Example

Unlike the other binary options contracts, ladder options offer more than one opportunity for a payout. Continuing with the previous BT example, a trader may believe that the price of the asset is going to fall following the announcement of BT’s financial results. However, the scale of the fall is not clear. Therefore, the trader enters a £100 binary options put contract with multiple steps on the ladder. The following terms apply:

• BT falls below £175.00 at 8:30 am – broker offers a payout of 20%
• BT falls below £170.00 at 8:30 am – broker offers a payout of 40%
• BT falls below £165.00 at 8:30 am – broker offers a payout of 60%

At 8:30 am, BT is trading at £170.00 and therefore the trader receives a payout of £40.

Note: This binary options example demonstrates how risky this type of trading can be. With the ladder option, the trader is risking £100 for a £40 return. In order for this to be a viable trading strategy, the trader would have to have a consistently high win rate (around 70%).

Using Binary Options Examples To Your Advantage

There are many benefits to understanding how different binary options contracts work:

• Good Fundamentals: Using worked binary options examples alongside theory is an effective way to gain a solid understanding of key trading concepts. Understanding the basics of the different contract types by studying theoretical examples is a good way to educate yourself.
• Better Strategy Selection: Binary options examples can help traders to determine which contract types to integrate into their overall trading strategy. For example, a less active trader might choose to invest in touch options, as their position will be closed out as soon the price is reached.
• Reduces Risk of Loss or Error: Well-educated binary options traders are less likely to make a mistake or a risky trade. Investors with a better fundamental understanding are more likely to have a higher win rate than those that haven’t researched binary options or the risks involved.

Bottom Line on Binary Options Examples

It’s important to understand the various types of binary options contracts that are available to retail traders. New investors, in particular, can benefit from studying worked binary options examples to help select the best contract type for their financial goals. In fact, building a strong understanding will be beneficial to any investor seeking success with this particular style of trading.

Use our list of the top binary options brokers in 2024 to get started.

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