With traditional financial instruments, you invest money without knowing precisely how much you can win or how much you risk losing. Binary options change this completely as with each trade, you know exactly what the return or loss will be. Part of becoming a successful trader involves understanding how the binary options payout structure works.
The concept of binary options is simple: you decide whether you think the price of an asset will be above or below the strike price at expiry, and then execute your trade accordingly. If you believe the price will move above the strike price, you execute a ‘call’ option. Alternatively, if you believe the price will dip below the strike price, you execute a ‘put’ option. In either case, there are only two possible outcomes: if your prediction is correct, your trade finishes ‘in the money’, but if it is wrong, it finishes ‘out of the money’.
One of the greatest advantages of trading binary options as opposed to traditional investments lies in the ability to mitigate your risk at the onset of each trade. All brokers operate according to the same principle; before entering any type of binary options contract, you will be shown the amount of the payout for an ‘in the money’ trade and the amount you will lose for an ‘out of the money’ trade. Variations apply in regards to how brokers calculate their payouts and which percentages they use. However, having this information before entering a trade allows you to evaluate your risk versus reward ratio and determine whether a trade is worth your capital.
Aside from the typical ‘in the money’ and ‘out of the money’ percentages, some brokers also offer their clients an ‘at the money’ payout, which means that if your underlying asset’s price closes at the strike price at expiry, the broker will give you a payout equal to the original cost of your position. Other brokers sometimes offer a variant on the ‘out of the money’ calculations: instead of you losing your entire investment on a position, you may get back a small percentage of your original investment. The recovery percentage is typically between 5 to 10% of your initial investment.
Understanding how binary options payouts work will be your springboard into profitable trades. You can take full advantage of this unique trait within the industry – knowing your payout or potential loss ahead of entering a trade contract – by making calculated decisions about your capital and carefully planning your trades in order to develop a long-term, successful strategy.