When a trader operates in the binary options market, basically what he does is a prediction about what direction will take the price of an asset for a predetermined period of time. When the time of option expiration arrives, the trade can produce two possible outcomes – the option expires In The Money or Out The Money.
When a trader incorrectly predicts the direction of the underlying asset price, then the option expires Out The Money, which means that this is a losing trade. In binary option strading, when the option expires Out The Money means that the trader was wrong with respect to his market forecast and therefore the underlying price moves in the opposite direction to the direction predicted during the expiration period of the option contract.
For example, if a trader opens a position with a Call binary option based on a particular asset, a negative result would occur if the asset price falls below the original exercise price (strike price). In the case of a trader who had placed a Put binary option based on a particular asset, a Out The Money result would occur if the asset price rises above the exercise price.
Example of a binary option that expires Out The Money
Take for example the case of a trader who believes that the price of gold (XAU/USD) will close down its current price of $1300 in a period of 1 day. In this case, the trader opens a Put binary option based on gold with a maturity of one day. The Put options are those acquired when a trader believes that the value of an underlying asset will go down for the time of option expiration. Continuing the example, suppose the price of gold rises and after the period of 1 day closes with a quote of $1350, which means that the option expires Out The Money (the trader was wrong about his forecast about the gold market) and the trader loses the amount invested in the transaction.
In the case of binary options what really matters is the final result and not the behavior of prices during the period in which the option is active. In the above example, if the price of the XAU/USD would have been below $1300 for 23 hours and 55 minutes but at the time of the option expiration the XAU/USD would have closed at $1310 for example, then the transaction would have finished Out The Money.
