Fortunately you don’t need a math degree to start trading binary options, or ‘digital options’, which is the alternative name for them, and nor do you need an amazing memory to learn the common place terms you will come across when you start trading.
The most common term of all is the collective name for what you are going to trade. You can trade a commodity, maybe gold, or oil, or even copper. You can also trade the individual stocks of well-known companies such as Facebook, Apple or McDonalds; you can trade stock indices like the NASDAQ, S&P 500 or FTSE 100, or you can trade a currency pair such as the EUR/USD or GBP/USD. These are collectively called ‘assets’, so the asset is the item that you are trading.
Let’s assume you want to trade the currency pair EUR/USD and the price at the moment is 1.2900, this is called the ‘market price’. You decide to read one of the financial newspapers to see if there is any economic news that will be published today that might affect the price of the pair. This is called conducting ‘fundamental analysis’. If you had decided to browse through historical price charts of the EUR/USD currency pair to identify historical chart price patterns you would be conducting ‘technical analysis’.
After your research, you conclude that the price of the EUR/USD will move higher, so you decide to buy a‘call option’ at a price of your choosing (1.2910) which is higher than the market price of 1.2900. This price is termed the ‘strike price’, and the time when the option expires is termed the ‘expiry time’.
If you had concluded that the price of the EUR/USD would move lower, you would have purchased a ‘put option’ and chosen a strike price which was lower than the market price of 1.2900, (say 1.2890).
Now you wait and watch. Are you going to predict correctly or not? The EUR/USD price doesn’t move at all at first and you are not making a profit or thank goodness a loss on the deal. This situation is called being‘at-the-money’, and if the price at expiry was at-the-money, you would break even. However, the price starts to move quite rapidly and is quite volatile. Initially it falls to 1.2885, and you become agitated because now the option is ‘out-of-the-money’, and if the price remains where it is you will make a loss on the transaction and lose your initial ‘investment amount’.
However, as time passes the price of the EUR/USD starts to climb and moves above 1.2910 which is your strike price. Now you are happy because your call option is deemed to be ‘in-the-money’, and you are going to get a nice ‘pay-out’ and make a nice hefty profit on the transaction, about 71% of your investment amount. Not bad eh?