Buying an options contract is in practice no different to buying stock. You are basically taking a long position on that option, expecting it to go up in value. You can buy options contracts by simply choosing exactly what you wish to buy and how many, and then placing a buy to open order with a broker. This order was named as such because you are opening a position through buying options. If your options do go up in value, then you can either sell them or exercise your option depending on what suits you best.

We provide more information on selling and exercising options later. One of the big advantages of options contracts is that you can buy them in situations when you expect the underlying asset to go up in value and also in situations when you expect the underlying asset to go down. If you were expecting an underlying asset to go up in value, then you would buy call options, which gives you the right to buy the underlying asset at a fixed price.

If you were expecting an underlying asset to go down in value, then you would buy put options, which gives you the right to sell the underlying asset at a fixed price. This is just one example of the flexibility on these contracts; there are several more. If you have previously opened a short position on options contracts by writing them, then you can also buy those contracts back to close that position.

To close a position by buying contracts you would place a buy to close order with your broker. There are basically two ways in which you can sell options contracts. First, if you have previously bought contracts and wish to realize your profits, or cut your losses, then you would sell them by placing a sell to close order.

The order is named as such because you are closing your position by selling options contracts. You would usually use that order if the options you owned had gone up in value and you wanted to take your profits at that point, or if the options you owned had fallen in value and you wanted to exit your position before incurring any other losses.

The other way you can sell options is by opening a short position and short selling them. This is also known as writing options, because the process actually involves you writing new contracts to be sold in the market. When you do this you are taking on the obligation in the contract i.

if the holder chooses to exercise their option then you would have to sell them the underlying security at the strike price if a call option or buy the underlying security from them at the strike price if a put option. Writing options is done by using the sell to open order, and you would receive a payment at the time of placing such an order.

This is generally riskier than trading through buying and then selling, but there are profits to be made if you know what you are doing. You would usually place such an order if you believed the relevant underlying security would not move in such a way that the holder would be able to exercise their option for a profit. For example, if you believed that a particular stock was going to either remain static or fall in value, then you could choose to write and sell call options based on that stock.

You would be liable to potential losses if the stock did go up in value, but if it failed to do so by the time the options expired you would keep the payment you received for writing them. Options traders tend to make their profits through the buying, selling, and writing of options rather than ever actually exercising them. However, depending on the strategies you are using and the reasons you have bought certain contracts, there may be occasions when you choose to exercise your options to buy or sell the underlying security.

The simple fact that you can potentially make money out of exercising as well as buying and selling them further serves to illustrate just how much flexibility and versatility this form of trading offers. What really makes trading options such an interesting way to invest is the ability to create options spreads. You can certainly make money trading by buying options and then selling them if you make a profit, but it's the spreads that are the seriously powerful tools in trading.

A spread is quite simply when you enter a position on two or more options contracts based on the same underlying security; for example, buying options on a specific stock and also writing contracts on the same stock. There are many different types of spreads that you can create, and they can be used for many different reasons. Most commonly, they are used to either limit the risk involved with taking a position or reducing the financial outlay required with taking a position.

Most options trading strategies involve the use of spreads. Some strategies can be very complicated, but there are also a number of fairly basic strategies that are easy to understand.

You can read more about all the different types of spreads here. There are actually a number of benefits this form of trading offers, plus the versatility that we have referred to above. If it does, you receive a set payoff. You should be able to see from these examples why it might be advantageous or otherwise to trade binary options. Looking at our Forex example, what are the possibilities here? You could win a set amount of money, possibly a large set amount of money, from a small movement in the right direction; if you lose, all you lose is the amount you paid on the spread.

The drawback here is that binary options often have a very high spread. Should you trade binary options or not? That depends on your trading style and whether they appeal to you. As with other forms of trading, there is a certain amount of luck involved with all of your binary options trades — but there is also room to use skill and intuition to become profitable. Check out the rest of our articles on binary options trading to figure out if binary options trading may be right for you.

What Is Binary Options Trading? Types of Binary Options Binary options come in two specific types: cash-or-nothing binary options and asset-or-nothing binary options.

Home » Accounting Dictionary » What is Binary Trading? Binary trading indicates that investors can choose from only two investment possibilities, in which the payoff is either a fixed amount of money as compensation or nothing at all.

In binary trading, buying the binary indicates that, for the investor, the outcome will be true, while selling it shows that the investor is guessing the result will be false. The only two pay-offs are a total dollar amount at the end of a pre-established time period or losing the entire investment. In financial markets, investors predict, for example, the fluctuation of the value of a certain asset during a defined period of time.

But if he guesses wrong, the entire investment is lost. Binary trading alternatives have two main classifications: the cash-or-nothing type, which pays some fixed amount, and the asset-or-nothing kind, that pays the value of the underlying asset according to the investment contract.

Investors use binary trading to invest in commodities, stocks, and currency exchanges. Menu Accounting Topics Financial Accounting Basics Accounting Principles Accounting Cycle Financial Statements Financial Ratio Analysis Assets CPA Exam CPA Review Courses CPA Requirements CPA Exam Sections Score Release Dates Accounting Certifications Quizzes Crossword Puzzles Multiple-Choice Questions Fill-in-the-Blank Questions Matching Questions Word Scrambles Examples Dictionary Careers Pro Course.

What Does Binary Trading Mean? Contents 1 What Does Binary Trading Mean? Search for:. Basic Accounting Course Financial Accounting Basics Accounting Principles Accounting Cycle Financial Statements Financial Ratio.

There are several common attributes and features of binary options. Binary options trading offers investors a variety of time frames to choose from, depending on their investment goals. By Daniel Epstein Daniel Epstein is a senior financial research analyst at FinancesOnline and the architect behind our Fintech and ERP content division. There is certainly a lot you should learn before you actually get started and invest your money. The offers that appear in this table are from partnerships from which Investopedia receives compensation. His work has been frequently quoted by such publications as Forbes, USA Today, Entrepreneur, and LA Times. Now that you know what the fees are with binary options, you can decide if this type of trading is right for you.

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