There are a lot of basic terms and terminology about Binary Options Trading that you should be familiar with if you want to step into binary options market to make the most of your investment. It is of vital importance for you to get a strong grasp on the basics of binary options trading mechanism to take full advantage of your first few investments and avoid potential losses in the very beginning.
European and American styles are two types of trading where you can trade binary options. European options are the most commonly traded options because they are traded on a shorter duration as compared to American options. This is the reason why most of the traders prefer European options over American options. There are some other differences between the two options styles that you must know.
Here are some of the terms that may help you understand American and European binary options:
Put Option: Put option or put contract refers to your right to sell an asset on or before the expiration date at a specified price which is called as strike price. Traders investing in American options can execute such contracts at any time before the expiration date.
Call Option: Call option or Call Contract refers your right to buy an asset on or before the expiration date at strike price. Just like in Put Option, this can be executed at any time before the expiration of the contract in American market. However, if you are trading in Europe options then the contract can only be executed at the expiration time.
Underlying Security: Underlying security is the present equity position on which the contract is carried out. For example, you can use Put option on Yahoo to secure the right to sell your shares of Yahoo. The rule regarding underlying security is same for both American and European options.
Strike Price: The most important concept in binary options is that of strike price. A strike price of the contract refers to the price at which you sell or buy options. You get profit from ever changing market trends by buying or selling options at strike price.
In-the-money: The term in-the-money is used to indicate a profitable scenario. For example, if the price of a specific call options goes above the strike price, then the contract is said to be in-the-money state. When this happens, you get profit from the trade.
Out-of-the-money: The term out-of-the-money is exact opposite of in-the money. So, when the strike price of call options remain above the current market price of an asset, the contract is said to be in out-of-the-money state. This will not be profitable for you, the trader. It is important for you to know about the latest price of an asset and the factors that might affect the price to a shocking extent.
Put or call premium: Put or call premium refers to the price of every contract that is paid against securing the rights to sell or buy options respectively. It must be noted that all binary options may not necessarily be subject to a put or call premium and terms of the broker must be fully comprehended by the trader.
These are some of the basic terminologies of both American and European options that you must be fully aware of before starting to take part in binary options trading. The terms may be different for different brokers present on the internet. Make it a point to understand the terms used by your broker to make informed decisions regarding your trading.