How do I trade Binary Options?

About Binaries
Binary Basics
Binaries and Options

Frequently Asked Questions

Start here for basic questions on:
HedgeStreet
Fees
Account Opening
Security & Privacy

See Binaries in Action on the Trader Center

Binaries and Options

How are Binaries like Options?

If you have traded options before, Binaries seem familiar and foreign at the same time. Like standard options, Binaries allow you to speculate on the upside (like Calls) and downside (like Puts), but Binaries offer more price action close to the strike price (at-the-money), and less away from the strike price (out-of- and in-the-money). Moreover, Binaries can be used in conjunction with Options as a new way to compliment your options trading strategies. Let's walk through some simple scenarios comparing Binaries and Options.

Trading with Options

Let's consider the payoff of a simple Call Option for Gold at expiry.

In this case, the value of the Option goes up dollar for dollar as Gold rises above $700. There is unlimited upside. The downside is simply the price of the Gold Option. If Gold finishes below $700 the option is worthless.

Trading with Binaries

Next let's look at a payoff for a Binary on Gold at expiry.

In this case, the value of the Binary is $10, if the strike is over $700, or $0 if not. If Gold closes even a penny over $700, the payoff jumps to $10, but has limited upside (stays at $10) as the price goes up further. The downside is simply the price of the Gold Binary. If Gold finishes $700 or below, the Binary is worthless.

Option Time Value

Options have time value.

In this case, 30 days prior to expiry, the time value of the Option increases as the price of Gold nears the strike price ($700), and decreases slowly as the value of the underlying Gold price moves away from the strike (increases or decreases).

You pay for time value whenever you buy a Call Option (the sample applies to Puts).

Binary Time Value

Binaries also have time value but it can be positive or negative.

In this case, 30 days prior to expiry, the time value of the Binary changes sharply when it's near the strike price. It is positive below the strike (Buyer pays for it and his value decays if price does not move) and negative above the strike (Buyer gets credit for it and his value increases if the price does not move).

Binaries and Options Side-By-Side

When you overlay Binaries and Options, it gets interesting.

A Binary's value rises dramatically near the strike price and then levels off; a standard Call's value rises slowly near the strike but has unlimited upside. A Call buyer always pays for time value (Call value decays as price stays the same); a Binary's value decays below the strike, but increases above the strike, when the price does not move.

Aggressive Buying Strategy for Binaries

An aggressive strategy is to buy an out-of-the money Binary in lieu of a standard call.

Let's say Gold was trading at $699 and you thought it was going to move up slightly to $702.

In this example, you can pay the same cost for the Binary as the Option ($2) and realize a much greater gain ($8) for a small movement in Gold ($1).

Of course, if you think Gold is going to go up beyond $710, buying the Call Option could possibly deliver higher profits.

Conservative Buying Strategy for Binaries

A conservative strategy is to buy an in the money Binary in lieu of a standard call.

Let's say Gold was trading at $708 and you thought it was going to move up slightly, or stay flat. You were also concerned that it might fall, but only slightly.

In this example, you can pay the same cost for the Binary as the Option ($8) and realize a respectable upside ($2), but with less downside. As long as Gold stays above $700, you get the $10, whereas if Gold moved down even to $705, you would lose money on the Call option.

Of course, if you think Gold is going to go up beyond $710, buying the Call Option could possibly deliver higher profits.