Glossary

Terms associated with binary options trading explained.

Binary Options, as with many forms of trading, has many unique words and phrases that may not be familiar to investors new to this form of investment. Some terms are obscure enough to have escaped even seasoned traders. Here we have tried to collate as many of those binary option terms as possible, and listed them in our glossary alphabetically. If you are looking for a particular term and it is not covered, please let us know via our contact us page and we will gladly look to add it.

American-Style Option

An option contract that may be exercised at any time between the date of purchase and the expiration date.

Arbitrage

The simultaneous purchase and sale of financial instruments in order to benefit from price discrepancies.

Ask Price

This is the price at which a potential seller is willing to sell.

At the Money

When an option’s strike price is the same as the prevailing stock price.

Bear Spread

An option strategy that makes its maximum profit when the underlying stock declines and has its maximum risk if the stock rises in price.

Beta

A figure that indicates the historical propensity of a stock price to move with the stock market as a whole.

Bid Price

The price at which a potential buyer is willing to buy from you.

Bid/Ask Spread

The difference between the prevailing bid and ask price. Generally, option contracts that are more liquid tend to have a tighter Bid/Ask Spread while option contracts that are less liquid tend to have a wider Bid/Ask Spread.

Binary Options

Options that either pay you a fixed return when it ends up in the money by expiration or nothing at all. Read more about Binary Options.

Break

Even Point- the price at which a particular strategy neither makes nor loses money.

Bullish Options Strategies

Different ways to use options in order profit from an upwards move in the underlying market.

Buy To Open

To establish an options position by going long.

Call Options

Option which gives the holder the right to buy the underlying security at a specified price for a certain, fixed period of time.

Cash Settlement

Options which, when exercised, delivers the profit in cash instead of an underlying asset.

Close

Period at the end of a trading day where final prices for the day are calculated.

Contract Size

The amount of underlying asset covered by the option contract.

Contract Neutral Hedging

A static hedging technique involving buying 1 put option or selling 1.

Day Trader

Traders who open and close option positions or multiple option positions all within the same trading day.

Delta

The amount by which an option’s price will change for a corresponding change in price by the underlying entity. Call options have positive deltas, while put options have negative deltas.

Delta Neutral

When positive delta options and negative delta options offset each other to produce a position which neither gains nor decreases in value as the underlying stock moves slightly up or down.

Derivatives

A financial instrument whose value is derived in part from the value and characteristics of another financial instrument. Examples of derivatives are options and futures.

Exercise

To invoke the right granted under the terms of a listed options contract. The holder is the one who exercises. Call holders exercise to buy the underlying security, while put holders exercise to sell the underlying security.

Exercise Price

The price at which the option holder may buy or sell the underlying security, as defined in the terms of his option contract.

Expiration Date

The day on which an option contract becomes void.

Expiration Time

The time at which an option expires.

Expire Worthless

When out of the money options lose all their value and expire.

Extrinsic Value

Also known as “Premium Value” or “Time Value”. It is the difference between an option’s price and the intrinsic value.

Financial Instrument

A physical or electronic document that has intrinsic monetary value or transfers value. For example, cash, shares, futures, options and precious metals are financial instruments.

Gamma

The rate of change of a stock option’s delta for one unit change in the price of the underlying stock.

Greeks

A set of mathematical criteria involved in the calculation of stock option prices.

Hedging

The process of placing a trade in order to reduce risk on other trades or assets.

Index Futures

A futures contract on an index in the futures market.

Indicators

Data such as interest rates, inflation and employment figures, which indicate the strength and significant trends in a nation’s economy.

Inflation

The rate at which the price of goods and services rises within an economy.

Initial Margin Requirement

This is the amount needed as available trading resources in your account in order to open a position.

IPO

Initial Public Offering. Private company’s first offer of stock to the public.

In-the-money Option

A put option that has a strike price higher than the underlying future price, or a call option with a strike price lower than the underlying futures price.

Intrinsic Value

The value of an option if it were to expire immediately with the underlying stock at its current price.

Lagging Indicators

Economic indicators that follow rather than precede a country’s overall pace of economic activity.

Last Day of Trading

The last day on which you can open or close a trade in a particular market. The last trading day is not the same as the expiry date.

Leading Indicators

Economic indicators that change before the economy changes.

Leverage

A technique to multiply gains and losses. Most often used when buying more of an asset with borrowed funds. (Also referred to as “gearing”)

LIBOR

London Interbank Offered Rate.

Long

A buy position opened in the expectation that the market price will rise.

Margin

The deposit or available credit needed on your trading account in order to keep your positions open.

Margin Call

A call from the credit department for further funds to be deposited in the account to support additional exposure from running losses.

Offer

The price offered at which someone can buy; also called the ask.

Option

A financial derivative instrument that gives the right to purchase (call) or sell (put) a fixed amount of stock at a specified price and within a certain time limit.

Option Writer

Also called the option seller, an option seller grants the right to trade a security at a given price in the future.

Out-of-the-money Option

A call option is out of the money if the strike price is greater than the market price of the underlying security.

Portfolio

A collection of financial investments.

Put Option

A put gives a trader the right, but not the obligation, to sell the underlying instrument at a fixed price up to a predetermined date.

Real Time

A real-time stock or bond quote is one that states a security’s most recent price as opposed to a delayed quote.

Resistance Level

A price level above which it is difficult for a security or market to rise.

Short

A sell position opened in the expectation that the market price in that underlying product will fall.

Spot Market

A market in which commodities are bought and sold for cash and immediate delivery.

Spread

The difference between the buy and sell price of an asset.

Stop Loss Order

An order to close a position at a particular level when the price moves against you.

Stop Order

An opening or closing order to buy or sell at a worse price to where the market is currently trading.

Straddle

Purchase or sale of an equal number of puts and calls with the same terms at the same time.

Strangle

Buying or selling an out-of-the-money put option and call option on the same underlying instrument, with the same expiration. Profits are made only if there is a drastic change in the underlying instrument’s price.

Strike Price

The stated price per share for which underlying stock may be purchased or sold by the option holder upon exercise of the option contract.

Support Level

A price level below which it is supposedly difficult for a security or market to fall.

Technical Analysis

Analysis of a financial market by charting its performance, using historical patterns, and focusing on trends.

Trading Range

Range between the highest and lowest prices at which a stock is traded.

Underlying Asset

The security or market on which derivative prices are based.

Volatility

A market that changes rapidly or suffers from extreme fluctuations.