A binary option is a transaction in which the issuer undertakes to pay the buyer a certain amount of money (option payoff), if at the time of option maturity its price/reference rate is higher (Call) or lower (Put) than the purchase price of the option. The buyer pays the issuer a premium for the acquisition of option rights.
There are several types of binary options:
- HIGH/LOW options – the buyer estimates whether the price of a given asset will be higher or lower than at the moment of option acquisition;
- Touch/No touch options – the buyer estimates whether a given asset will reach a certain price or not;
- Boundary options – the buyer estimates whether the price of a given asset will remain within a certain price bracket or will cross its boundaries.
Investors can either buy or put options, depending on the result they want to achieve.