Almost every trader can find a lot of exciting pieces of information about binary options. There are many overviews, articles and books about this market as well as many websites promoting binary options.
Be careful! Binary options look very simple but they are designed to be profitable for the brokerage firms not for you. In order to gain from this kind of financial products you must learn the methods of valuation and risk managements.
The binary or digital option is a bet. You can win all pool or loss all money you put on the table. For example you can put $20 for the EURUSD be over 1.3 tomorrow at 4 pm. If you win you receive $60. You may also lose your $20 if EURUSD stops below the barrier of 1.3000. Such bet is called a digital option with stake $60 and price 20/60 = 0.333. In other words if you multiply a price by a stake, you obtain an amount you must put on the table (ie. money you risk).
You can also sell this digital option. Lets assume that you sell it at a price of 0.31. If the stake will be for instance $100, you receive instantly 0.31*100=$31. You can do whatever you want with this additional amount of money until the day of expiration (tomorrow in our example). If the EURUSD is below 1.3 on expiration you win and you can save your $30 forever but if you lose you must pay $100. This means that you lost $70 (100-30).
The prices of digital options are always the numbers from the range from 0 to 1 (inclusively). If an event linked to the option occurs on expiration time the value is 1, otherwise the value of the option is 0. The broker always give you two prices: Bid and Ask. You can buy an option at Ask price or sell it to the broker at Bid price. Of course Bid is less than Ask.
How to find the value of the option? The idea is based on Monte Carlo method. The Option Evaluator simulates 1000′s of various of possible quotes’ trajectories and calculate the final option’s value for each trajectory. This huge set of data is used for fair price estimation. If your broker offers you better prices than indicated the program you may...
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