Misunderstood terms and sentences about binary options can lead to unsuccessful trades. So it would be very useful to find out the meaning of some specific terms and this will help you to understand better how a financial market works and what are its characteristics. Before starting a trade, check the list below and make sure you know all the concepts.
An underlying asset represents the specific item or type of item you are trading on, so it is the asset you purchase an option against. Some popular example would be: currency pairs (USD/EUR, USD/GBP), indices (Dow Jones, FTSE-100) and precious metals (Silver, Gold).
Bearish market is the term that describes a financial market whose prices are generally decreasing.
A range instrument refers to a trader decision where he can choose if the price of the asset will be inside or outside a specified range when the option expires. The range represents a higher or a lower target price limit.
Call options are chosen by traders when they predict that the price of the item they trade at will increase by the time of the expiration date. If the price increases in that moment, traders earn money based on the percentage set prior to bidding.
Put options are the opposite of Call, so they are chosen when traders expect that the price of the asset will decrease at the expiration time. If this happens, they will earn money based on the percentage set prior to bidding.
Market price refers to the current price of the underlying asset and it is reported in real time by a data provider. However, some trading sites will report delayed results, this being specified in their terms and conditions.
The strike price is the price of the underlying asset at the time when the trader purchases the option. When it expires, the new price of the option is compared with the strike price and this is how a trader profit or losses are determined: he is “in the money” or “out of the money”.
In the money is the point when a purchased option brings profit for the trader. This is the situation when the trader places a Call option and it expires above the target price or he chooses a Put option and it expires below the target price.
Out of the money is the situation when the option has no gain and the trader loses money. This happens when the trader chooses a Call option and it expired below the target price or he chooses a Put option and it expired above the target price.
At the money represents a position in which the option is at the same price at which it was purchased, in this case the gain being neutral.
Assuming that you advanced your knowledge about the most important terms of binary options, now you can follow the next step and fix your future strategies on a financial market.