Binary option contracts, being an over the counter product, offers the flexibility to be customized as per the needs of a trader. This is a great advantage when compared to vanilla options. Using this, binary option brokers introduce new derivative products and register exponential growth year after year. In this regard, the most common varieties of the trades offered by a binary broker are presented below:
- High / low (Above / below or up / down):
It is nothing but a call or put option contract offered in a different name. A high/low contract is usually a short duration contract with an expiry period ranging between 30 seconds and 10 minutes. There are instances where such a contract is offered with an expiry period of more than one hour as well. A ‘high’ contract is bought when a trader anticipates a rise in the price of an asset, while a ‘low’ contract is bought when a trader expects a decline in the price of an asset.
A trader is said to have won a high trade, if the prevailing price of the underlying asset in the spot market is higher than the price which prevailed at the time of entering the trade. Similarly, a trader is considered to have won a low trade, if the prevailing price of the underlying asset in the spot market is lower than the price which existed at the time of entering the trade. To stand unique, some brokers offer the ‘High/Low’ contracts as ‘Above/Below’ contracts.
- One touch binary options:
As the name indicates, these contracts provide a target level or strike price to be achieved by the asset within the expiry period. If the price violates the strike price, then the trader is said to have won (in-the-money) the trade. It should be noted that there is no need for the price to stay above or below the target level provided by the broker. It is enough if the price violates the level once before the expiry period of the contract. As it can be understood, for every given asset, a binary broker usually offers two strike prices, one above and one below the prevailing price. A trader who believes that the price will trend upwards should select the one touch option with a target level above the prevailing price in the spot market.
On the contrary, a trader who believes that the price will trend downwards should select the one touch option with a target level below the prevailing price in the spot market.
If the price fails to touch the target level before expiry, then the trader would lose (out-of-money) his entire investment. The returns from a successful trade can range from 70% to 400% or more on the investment. The contract is a preferred choice of traders who expect the price of an asset to move in a single direction. Usually, traders look forward to purchase a one touch call or put option when there is a scheduled high impact data announcement such as unemployment change, non-farm payroll, GDP data, inflation rate, etc.
- Double one touch binary options:
It is almost similar to the one touch binary options contract, but with an exception – there will be two target prices, one below and one above the price of the underlying asset, instead of one. The trader is stated to have won the trade as long as the price of the underlying asset violates any of the two levels. Since the probability of success is relatively higher than a one touch call (or put) option, the returns are little bit lesser in the range of 70% to 89%. Moreover, only a selective list of brokers offers such contracts. The contract can be traded as long as the trader believes that the implied volatility in the market would rise in due course of time, but unsure about the price trend of the asset. The contract should be avoided in a calm or lacklustre market.