Are you already aware of the necessary terms used in option trading?
Binary option trading is way more different from forex trading; through their mode of entering the market and the process through which traders have to undergo before they start to trade.
However, the terms used in option trading are not the same with that of forex, but might have similar meanings.
While trading options, there are some important terminologies you need to get yourself abreast with. You need to be informed– to avoid being confused when the need arises.
#1 Call: This term give an indication that the value of an asset will rise above the set price. Whenever an option trader is placing a call action on an asset, for example GPB/USD; It simply means that the trader is assuming that the value of this currency pair will rise above its current set price.
#2 Put: The put action term is the opposite of the term Call. It is an indication that show the value of an asset will fall below its current set price. If an option trader is placing a put action on an asset, for example GPB/USD; It simply means that the trader is assuming that the value of this currency pair will fall below its current set price.
#3 Expiry time: Just like it sound “expiry”—it’s the period of time that defines the end of a trading section. It could be a long time frame or a short time frame. For example, If trader A selects an expiry time of 60 seconds to trade a currency pair or any asset. It simply means that the entered trade expires after 60 seconds.
#4 Strike price: The strike price simply refer to the exact price at which an asset might be purchased or sold at a selected period of time. Also, in option trading, strike price varies depending on the action.
If a trader is considering a call option, the strike price indicates the buying price. On the contrary, if the same trader is also considering a put option, the strike price indicates the selling price at that instant.
#5 In-the-money: This is a winning indicator. Whenever a trader is in- the –money after a trade or a transaction, it simply means that the trader has made profit.
For example, an option trader invested $50 dollar from his capital investment on EUR/USD and at an expiry time of 60 seconds. After 60 seconds, the transaction ended in the money and he made whoop profit of $40.
From the illustration above, you’d see that the trader ends his trade in-the –money, and made a profit of $40.
#6 Out-of-money: This is a losing indicator. It’s contrary to “In-the-money”. Still, whenever a trader is out-of-money after a trade or a transaction, it simply means that the option trader has lost all the money he invested on the trade at the expiry time frame. In other words, he is out of money.
For example, an option trader invested $50 from his capital equity on EUR/USD and at an expiry time of 60 seconds. After 60 seconds, the transaction ended out of the money and he lost the invested money $50.
Apparently, from the illustration above, it’s quite clear that the trader is out of the money.
#7 Long term: Just as it sound, It suggest a longer expiry time to trade an asset which ranges from a day to sometimes weeks.
#8 Short term: Also, just as it sound, It suggest a shorter expiry time to trade an asset which sometimes ranges from 30 seconds to 300 seconds; at most a day.
#9 Speed option: Whenever you see speed option, it simply means that the trader wants a speed mode of trading. In other words, he wants to see his investment accumulate much more rapidly.
The time frame for the speed options follows this array-30, 60,120, 180 and 200 seconds.
Note: Just as the trader wants to see his investment accumulate faster, so also should he be willing to lose his investment faster when the trades end out of the money.
#10 One touch: This is a form of a trading tool, where by an option trader will forecast that a particular asset will touch a certain set price at an expiry time. Meanwhile, if it happens that asset touches the target set price, their payout is huge.
For example, if an option trader is trading a currency pair of JPY/USD, and forecasted that JPY/USD whose current strike price is 1.0000 will touch a target set price of 1.0090 at an expiry time of 60 seconds. If it happens that the currency pair touches the target price at 60 seconds, then the trader has made a huge profit. Some brokers offer up to 400% profit for a winning trade.
#11 Passive Investment: This is a form of investment whereby trader invests a low fraction of its capital to trade a particular asset. In this scenario, the trader doesn’t want to adopt much risk management with the fear of losing the investment.
Actually, the lesser a trader invest the lower the returns of the investment. For example, if a trader has a capital of $500 and invest $12 on a specific strike price of an asset. Remember that the binary option trades ends in two ways, either in loss or in gain.
However, if the trade ends in the money at the expiry time, the trader will receive a less return of $11.25. On the contrary, if the trade happens to end out of the money, the trader will lose only the little he had invested.
#12 Aggressive Investment: This form of investment is the opposite of “passive investment”. Here, the trader is an aggressive investor. In other words, an aggressive trader is willing to invest a high fraction of its capital to trade a particular asset. In this scenario, the trader is not scared of losing the investment, but rather motivated by the high return.
In addition, the higher a trader invest the higher the returns of the investment. For example, If a trader has a capital of $500 and invest $250 on a particular strike price of an asset, the will definitely end in two ways. It is either in loss of in profit.
But, if the trades end in the money, the trader will receive a high return of about $112.5 but if the trade ends out of the money he’ll lose all the invested money I.e. the invested $250.
#13 The 5/15 rule: In option trading, the 5/15 rule is a risk management tool. It’s simply the ratio of the percentage of investment executed in a single trade to the investment percentage of the entire capital.
For example, if a trader has a total balance of $1000 in his account. Considering the 5/15 rule, he might decide to risk or invest 5% ($50)of the total balance in a single transaction and up to 15%($150) of the entire capital portfolio. This rule suites a low risk trader
#14 The 10/30 rule. This is a risk management tool for high risk taker. It’s simply the ratio of the percentage of investment executed in a single trade to the investment percentage of the entire capital.
In this instance, a trader has a total capital balance of $1000 in his account. Considering the 10/30 rule, he might decide to risk 10 %( $100) of the total balance in a single transaction and up to 30 %( $300) of the capital portfolio for the entire transaction.
In summary, It’s very much important that you learn and understand the above terminologies; for they will guide you in understanding binary option trading more easier.