Binary Options on Currencies

In recent years, in the community of financial markets many traders of all types (large and small) have chosen to trade with currency pairs in the Forex market for various reasons. Part of the appeal of trade in the Forex market, either through Forex spot market or traditional options on currency pairs, is that the prices of currency pairs are in constant motion. We currently live in an interconnected world where a change in the US economy, for example, not only have an impact on the US dollar but also in other currencies such as the euro, Australian dollar and Japanese yen.

If a trader makes the decision to trade binary options on currency pairs, it is important to develop a trading strategy which necessarily requires an adequate understanding of the interrelationships between currencies. For example, if we are trading with options based on the USD/JPY, it is important to have a clear idea about the yen sensitivity to changes in the dollar. Learning the basis of the behavior of the currency pairs in the Forex market is essential to maximize opportunities when trading binary options based on these instruments.

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Basic Types of Binary Options


Binary options are instruments that are characterized by their simplicity and high profits, which has led to a surge in popularity that extends each day. Most known regular binary options, known as digital options which normally are associated with these financial derivatives transactions. However, binary options brokers offer other types of binary options that any trader should know as they may offer a variety of opportunities.

The main types of binary options are:

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In The Money (ITM) Binary Options


The flexibility of binary options trading compared to other financial products offers a number of opportunities for the trader, including the ability to speculate based on a variety of markets, which in turn offer a wide selection of underlying assets including currency pairs (Forex), stock indices, commodities and stocks. Having such a variety of assets among which we can choose, there are greater possibilities for the trader to perform an operation with a binary option that ends In The Money.

When we trade with binary options, there are two possible outcomes. The role of the trader in this scenario is to predict whether the price of the underlying asset will go up or down with respect to a certain price (usually the entry price of the option) and an equally predetermined period of time, known as expiration period or expiration time.

For example, if the trader predicts that the underlying price will go up for the time of the option´s expiration and at the end this prediction is correct, then the transaction will have a “In The Money” result in the expiry of the contract. In this case, because the option expires In The Money, the trader receives the default payment for the transaction. Alternatively, if a trader predicts the direction of the asset price incorrectly, then the result of the operation at the time of maturity will be Out The Money.

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Out The Money (OTM) Binary Options

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.

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At The Money (ATM) Binary Options

At The Money Binary Options
In binary options trading a trader must predict the price movement of an asset in the market during a predetermined period (the expiration period or maturity). When the time of option expiration arrives, it can produce only one of three possible outcomes for the trade.

If the price of the underlying asset moved in the direction predicted by the trader, then the option will have expired In The Money (a winning trade). But if the asset price moved in the opposite direction, the option will have expired Out The Money (a losing trade). However, it is said that a binary option has expired At The Money when the option value ends at the same level as the original exercise price (strike price) once the maturity of the transaction occurs. For the trader, an option that expires At The Money results in an operation that does not generate profits or losses as it is considered that the option did not end in the gains zone or the loss zone. In other words it is a transaction that ended in a “tie”.

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Expiry Time – Binary Options

In binary options trading, the expiry time or maturity is defined as a predetermined time, or hour in which the result of a trade is determined. When a trader opens a position with options, the broker indicates the relevant expiry time for the binary option. When that moment arrives, the value of the underlying asset (known as Expiry rate) is determined, which results in a positive or negative result of the transaction for the trader.

When a trader opens a position with digital options (High/Low), the time of initiation of the trade is known as Strike Time. Before the execution of the transaction, the trader is required to select an underlying asset and make a prediction about price direction. If the trader believes that the asset price will go up, he places a call option based on the asset, but if he thinks that the price will go down, then he places a Put option based in this asset.

Depending on the broker, the trader receives a range of alternative of maturity periods that can be applied in a variety of types of underlying assets (Forex, stocks, indices and commodities). This range of maturities includes periods of a few minutes, hours, days or even weeks. The expiry time is an important element in the execution of a trade with binary options, as the length of time may influence how the price of an asset reacts to various changes in the market. Once the transaction reaches the expiry time of the binary option, the value is determined, and finally is determined whether the trader’s prediction was correct or not, and subsequently, if the transaction finished In The Money or Out The Money.

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