Though the concept behind binary options is still very trader-friendly, constant and fast-paced financial innovation has already led to a few different offered types. What’s so remarkable about this is that the varying types are all just as easy for traders to pick up as basic binary options. Detailed below, these different option classes all adhere to the principle of creating a market open to all sorts of traders.
“Cash or Nothing” and “Asset or Nothing” Binary Options
These two terms constitute the most basic form of binary options. With a “cash or nothing” option, the contract created pays out a previously agreed-upon price, as long as the price of the underlying asset is either above (on a call) or below (on a put) the strike price of the contract at expiration. In this case, the payout price and asset price are completely unrelated, in that winning traders get the same amount of cash whether the price is $1 or $100 into “in-the-money” territory.
The “asset or nothing” class is typically offered by non-traditional binary options brokers. When a trader buys a winning contract on one of these options, they are given a unit of the asset itself instead of a fixed amount of cash. Thus, the price of the asset at expiry determines the trader’s gain. For instance, if a call is bought for $50 on a binary option for Microsoft stock at a strike price of $100, and the stock’s price is $110 at expiry, the trader receives a net profit of $60.
“One-Touch” and “No Touch” Binary Options
This second class of binary options is relatively new, and affords traders the opportunity to predict whether an asset’s price will hit a certain level throughout the entire length of the contract, not just at the finish. In “one-touch” options, the trader wins a fixed amount if the asset’s price actually touches a given level at any point during the contract’s duration. As soon as the asset’s price hits the specified level, the contract is exercised and the winnings are paid out.
“No-touch” binary options pay out a fixed amount if the opposite occurs. That is, if the asset’s price stays above or below a certain level throughout the length of the contract. As soon as the asset’s price hits the specified level, the contract becomes worthless. If it still hasn’t touched that level at expiry, winnings are paid out.