What is a Binary Option?
A binary option is a kind of options contract that pays a fixed amount or nothing at all based on a yes/no question. Usually, the question is about whether the value of an asset will go up or down from a certain level. The holder of the binary option does not need to do anything else after buying the option because it will automatically settle. A binary option is different from other options because the holder cannot buy or sell the asset itself. The holder only gets a fixed amount of cash or nothing when the binary option ends.
Binary Options trading in India
Binary option trading is not legal in India. The Reserve Bank of India (RBI) has not approved binary options trading in India, as it is deemed a form of gambling and is therefore not regulated by any financial institution in India. If you ever become a victim of a scam while trading in binary options, you will have no support from a court or SEBI.
Example of Binary Option Trading
You're observing Tesla (TSLA) closely and believe its recent upward trend will continue. You decide to enter a binary option contract with the following parameters:
Underlying asset: Tesla Stock (TSLA)
Contract type: Call option (betting on a price increase)
Strike price: $800 (the price you predict TSLA will reach)
Expiry time: 3 days from now
Payout: 80% (if your prediction is correct)
Investment: $200
Outcome 1: Prediction Correct - Profit
If TSLA's price reaches $800 or higher before the expiry time, your prediction is correct. You win the contract and receive a payout of 80% of your investment, which is $160. Your total return is $360 ($200 investment + $160 payout).
Outcome 2: Prediction Incorrect - Loss
If TSLA's price remains below $800 at expiry, your prediction is wrong. You lose the contract and your entire investment of $200.
Risks to Highlight:
All-or-nothing: This example demonstrates the binary nature – win or lose everything.
High leverage: The potential gain is significantly higher than the investment, but so is the potential loss.
Market volatility: Stock prices can fluctuate rapidly, making binary options a risky proposition.
Limited timeframe: Expiry times can be short, adding pressure and potentially leading to rash decisions.