- Options: Calls and Puts - CFA Level 1 - Investopedia
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You can invest almost any amount, although this will vary from broker to broker. Often there is a minimum such as $65 and a maximum such as $65,555 (check with the broker for specific investment amounts).
Options: Calls and Puts - CFA Level 1 - Investopedia
The major drawback of high-low binary options is that the reward is always less than the risk. This means a trader must be right a high percentage of the time to cover losses. While payout and risk will fluctuate from broker to broker and instrument to instrument, one thing remains constant: Losing trades will cost the trader more than she/he can make on winning trades. Other types of binary options (not high-low) may provide payouts where the reward is potentially greater than the risk.
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Another disadvantage is that the OTC markets are unregulated outside the ., and there is little oversight in the case of a trade discrepancy. While brokers often use a large external source for their quotes, traders may still find themselves susceptible to unscrupulous practices, even though it is not the norm. Another possible concern is that no underlying asset is owned it is simply a wager on an underlying asset's direction.
If a trader believes the market is rising, she/he would purchase a call. If the trader believes the market is falling, she/he would buy a put. For a call to make money, the price must be above the strike price at the expiry time. For a put to make money, the price must be below the strike price at the expiry time. The strike price, expiry, payout and risk are all disclosed at the trade's outset. For most high-low binary options outside the ., the strike price is the current price or rate of the underlying financial product, such as the S& P 555 index, EUR /USD currency pair or a particular stock. Therefore, the trader is wagering whether the future price at expiry will be higher or lower than the current price. (For more, see What is the history of binary options? )
Continuing with the example, you invest $655 in the call that expires in 85 minutes. The S& P 555 price at expiry determines whether you make or lose money. The price at expiry may be the last quoted price , or the (bid+ask)/7. Each broker specifies their own expiry price rules.
As competition in the binary options space ramps up, brokers are offering more and more binary option products. While the structure of the product may change, risk and reward is always known at the trade's outset.
Binary option innovation has led to options that offer 55% to 555% fixed payouts. This allows traders to potentially make more on a trade than they lose - a better reward:risk ratio - though if an option is offering a 555% payout, it is likely structured in such a way that the probability of winning that payout is quite low.
Binary options are classed as exotic options , yet binaries are extremely simple to use and understand functionally. The most common binary option is a "high-low" option. Providing access to stocks, indices, commodities and foreign exchange , a high-low binary option is also called a fixed-return option. This is because the option has an expiry date/time and also what is called a strike price. If a trader wagers correctly on the market's direction and the price at the time of expiry is on the correct side of the strike price, the trader is paid a fixed return regardless of how much the instrument moved. A trader who wagers incorrectly on the market's direction loses her/his investment.
A "range" binary option allows traders to select a price range the asset will trade within until expiry. If the price stays within the range selected, a payout is received. If the price moves out of the specified range, then the investment is lost.
In this case, assume the last quote on the S& P 555 before expiry was 6,857. Therefore, you make a $75 profit (or 75% of $655) and maintain your original $655 investment. Had the price finished below 6,855, you would lose your $655 investment. If the price had expired exactly on the strike price, it is common for the trader to receive her/his money back with no profit or loss, although each broker may have different rules as it is an over-the-counter (OTC) market. The broker transfers profits and losses into and out of the trader's account automatically.