Options as we learned are forward contracts where an investor has a right to buy or sell an agreed volume for an agreed price on a future date. Options also include a lot of variety. The main option types are call option and put option. Call option refers to forward contract between two parties where the buyer of the option has the right and no the obligation to buy a commodity or any security which is agreed upon in the contract within a period of time which would also be mentioned in the contract. The Put option is on the contrary an agreement where a party has the right and not the obligation to sell an agreed volume of commodity. A new breed of options which has evolved is the Binary options
Binary options are rather simple to understand because it involves a simple mechanism. A binary option is also known as Fixed Return Options (FPO) as the investor knows the amount he is going to get before the option is exercised. The working of the binary options is entirely based on the prediction of the investor as to the direction of the movement of a stock price; also the prediction has an expiry period. A fixed rate is present if the investor predicts the right direction. Binary option is entirely aimed at new and novice investors who can exploit the market through this innovative instrument. Binary options are also known as Digital options.
Some of the highlighting advantages of Binary options are
- Controlled risk: The main advantage is that the investor knows what he is going to gain or to lose beforehand. This helps the investor to decide whether the gain is the worth the risk by matching it with the loss which is associated with the option execution.
- Simple: Next major advantage would be the simplicity of the working of the option. Here the investor only wants to decide upon the direction of change to invest which helps him to ignore many unwanted factors.
- Attractiveness: Binary options are really attractive due to its end outcome as an investor can enjoy the gain even if the actual change was a small one.
- Hedging instrument: Binary options can be used as a hedging instrument as it can be held against any other investment of the investor to offset any unpredicted losses due to the volatility of the market.
- Punctuality: Next attractive feature is the punctuality of the option as it works on an expiration date. Binary options are issued 24*7 which enables investors to trade in different time frames which can be advantageous as for the investors to rectify their mistakes in prediction.
One touch option
Now one touch options are a new breed of options where an investor get a pay out when the price of an underlying asset reaches or surpass a predetermined level. This option allows an investor to set the level of the barrier touching which the investor gets the payout which can also be decided by the investor along with the expiry date of the contract.
There are only two outcomes possible:
- First, the barrier is surpassed or touched and the investor gets the full payout as agreed upon on the contract.
- Second, the barrier is not breached and the investor loses the premium paid to the broker on the outset of the contract.
Both this situation only arises when the contract expires.
This type of options is generally useful for investors who believe that the price of the underlying asset will reach a certain level but not sure about the retention of that level. There are many online sites which facilitates the investors to carry out these transactions.