The call and the put option are the two most basic trades you will make as a binary options trader. For most people, these are the only types of options that you will ever need to worry about. Having a firm grip on what these are is a must if you want to have a chance of being a successful trader.
Call options are used to signify that you believe that an asset is going to go up in price over the course of a given expiry. Even if that price ends up a fraction of a penny, then your call option trade will be considered a correct one, and you will be rewarded with the full return from the broker that was originally agreed upon.
A put option is a prediction that the asset you are looking at will have dropped in price by the time the expiry comes. If you believe that the price is going to be lower, or that a bear movement is coming, then a put option is the right way to go.
The correct trade direction will need to be determined by your own analysis. As you have probably guessed, binary options can be profitable regardless of whether markets are moving up or down, making them a great tool for traders looking to make money in any kind of condition.
It doesn’t matter what happen in between the point of execution and the expiry. The only thing that matters for the outcome is whether the expiry price is on the side of the strike price (execution price) that you predicted. If you had a call option, then the expiry price needs to be above the strike for the trade to be a winner, and vice versa for a put option. In the event that both prices are equal, most brokers count this as a tie and will return your initial investment to you without a loss or a profit.
Call and put options come in all sorts of different expiries. Some brokers offer ultra short term options for timeframes as short as 15 seconds, although most brokers cap this at 60 second binary options. Long term options can go as long as one year out into the future. There are all variations between these two extremes.
The most popular binary options are around 5 to 15 minutes in length. Other expiries definitely have utility, although you will find that they are not as reliable. 60 second options are great when used correctly and sparingly, but they have a high degree of variance, and even when your analysis is correct, there’s a strong chance that you will have a losing trade. Ultra short term trades tend to heavily focus on currency pairs.
On the other hand, long term trades are easier to correctly predict, but your money is tied up for a long period of time (hence the “long term”), and the rate of return that you earn will be low in comparison to this. They are a decent hedging tool, but again, should be used sparingly.
The technical analysis methods that you use will vary depending on the asset that you are looking at and the timeframe that you are working with before expiry. Different trading strategies will also require you to be familiar with fundamental analysis and trading the news at different times.
Some brokers have spreads on their call and put options. These are not the Euro style binary options that we are referring to here. For the purpose of this brief explanation, we are talking about zero spread options where even the tiniest change in price in the correct direction is considered a winning trade. To learn more about these types of trades, refer to our section on CFDs.