Most people are aware of the basics of buying and selling, which essentially requires a trader to study the market, purchase an asset for a specific price, hopes that the price will increase, then sells the asset for the higher price and get to realize a profit. Well, the basics of binary options are different. Of course, the trader who is also called the buyer analyzes the market and deciphers the movements of the market, but the way to realize a profit and the outcome will be different to some extent.

A binary option, often referred to as a digital option, is actually a trading instrument which has a predetermined return that is decided at the beginning of the trade. Traders receive payout based on the predetermined amount if the binary option ends in-the-money, whilst a predetermined amount would also be paid if a loss occurred when the option ends out-of-the-money. All the markets whether currencies, indices, stocks and commodities can be assets when trading binary options.

As opposed to traditional options, these options will not have established prices, as the trader determines how much money to risk on the investment and would buy the option accordingly. When it comes to expiration times for binary options this is generally set for different time periods daily, so a trader can make a purchase at any time whether they want to go after an option that would expire in 5 minutes, 1 hour, 1 day or 1 month. Keep in mind that contracts with shorter time will be more suitable for intra-day or short-term trading.

Here is a typical example of trading binary options:

A trader is in the trading room at 10am and after reading the news, it was obvious that oil price was set to increase to US 80 per barrel, up from US79 by 2 pm. The trader logs into the binary options account to examine the percentage amount for payout on a call option if the oil expires at 2 pm at a US80 strike price.

According the data, this would give a 170% payout if the option ends in-the-money or a 90% loss if it ends out-of-the-money. With confidence of the market assessment, the trader makes a decision to invest US 500 on the call option. At 2 pm when the asset expires, the price was US 80.25 which means that it ends in-the-money. This gave the trader US 850 or 170% returns on the investment.

In general, when trading binary option there are just three possible results. The three outcomes will be fully known at time of purchase, so all the potential risks and rewards would be considered.