Another Example of a Binary Options Trade

One of most popular asset traded in binary options is the currency pair. This is where a purchaser predicts the price outcome of a currency with respect to the other currency in the pair. For exampe, the price ratio between the EURO and US dollar denoted in the following way as EUR/USD. A purchaser who thinks that the EUR/USD price will close at or above 1.1500 at 4:00 p.m. can buy a call option on that outcome. A purchaser who thinks that the EUR/USD price will close at or below 1.1500 at 4:00 p.m. can buy a put option or sell a call option contract. At 2:00 p.m. the EUR/USD price is 1.1490. 

The purchaser believes this will increase, so he buys 10 call options for EUR/USD at or above 1.1500 at 3:00 p.m. at a cost of $10 each. The risk involved in this trade is known. The purchaser’s gross profit/loss follows the "all or nothing" principle. He can lose all the money he invested, which in this case is $10 x 10 = $100, or make a gross profit of $10 x 10 plus a set amount of 82% payoff ($8.20 for each correct call) = $182. If the EUR/USD price will close at or above 1.1500 at 3:00 p.m. the purchaser's net profit will be the payoff at expiry minus the cost of the option: $182 – $100 = $82. The purchaser can earn this amount in as little as 30 seconds if he had chosen 30 seconds as his expiry date.

 As you can see he earn can money very quickly if his predictions are right more 50% of the time. These predictions can be correct close to 80% of time when predicted by experienced purchasers. This is the beauty of binary options trading. You can make a profit in a short period of time versus srock trading. The purchaser can also choose to liquidate (buy or sell in order to close) his position prior to expiration, at which point the option value is not guaranteed to be $100. The larger the gap between the spot price and the strike price, the value of the option decreases, as the option is less likely to expire in the money. In this example, at 3:00 p.m. the spot has risen to 1.1500. The option has expired in the money and the gross payoff is $182. The purchaser's net profit is $82.