Binary Options Terminology Explained

For those who wish to learn option trading, and how to trade binary options in particular, one of the first steps to take is to gain a thorough understanding of the highly customized terminology commonly used to refer to these various aspects of these derivatives.

To assist in this endeavor, the following list consists of frequently used words and phrases related to trading binary options that might make up part of a binary option trading guide.

Nevertheless, it is worth noting that the terms used to refer to characteristics of binary options can vary somewhat between different binary option brokerage firms, so be sure to clarify exactly what these terms mean at the binary options broker you intend to use.

Asset: Also sometimes known as the underlying, this term refers to a commodity, stock, index or currency pair upon which the binary options are based.

At the Money (ATM): The situation where the binary option’s strike price is the same as the current price of the underlying.

Binary Option: An option that pays out a fixed amount if in the money in return for a known premium that is paid up front.

Call Option: Sometimes called an “above” option, it gives the purchaser a fixed payout if the underlying market is higher than the binary option’s strike price.

Current Price: Refers to the presently prevailing value of the underlying asset that binary options are based on.

Digital Option: Another term used to refer to binary options, and especially to those binary options that have fixed odds.

Expiration: The date and time that binary options mature and when these options are determined to be in, out of, or at the money based on the value of the underlying.

In the Money (ITM): The situation where the binary option’s strike price is more favorable than the current price of the underlying.

Out of the Money (OTM): The situation where the binary option’s strike price is less favorable than the current price of the underlying.

Payout: The amount that binary options generate for the purchaser if they expire in-the- money.

Premium: The up front cost involved in purchasing binary options.

Put Option: Sometimes called a “below” option, it gives the purchaser a fixed payout if the underlying market is under the binary option’s strike price.

Straddle: A binary option trading strategy that involves purchasing both a binary put option and a binary call option with the same strike price.

Strangle: A binary option trading strategy that involves purchasing both a binary put option and a binary call option with different strike prices, usually with both strike prices set initially out of the money by a similar amount.

Strike Price: The asset price characteristic of binary options that the underlying market must exceed — in the case of a call option — or be below — in the case of a put option — in order for the binary option to generate a payout.

Underlying: This term, also sometimes called the asset or underlying asset, refers to the commodity, stock, index or currency pair that the binary options are based on.

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