In binary options trading, there are only two types of outcomes—you could make the right prediction or your prediction could be wrong. For example, say you guess that the price of an asset will rise after a certain expiry time and this actually happens, you will be said to have ended the trade in the money.
The Meaning of ‘Out of The Money’ and ‘In The Money’ Expiration
On the other hand, if you prediction turns out to be wrong and the price of the asset falls by the end of the expiry time, you would have ended the trade out of the money.
Let’s use an elaborate example to show how these two terms work:
Say you want to initiate a binary trade option on the USD/EUR currency pair. After assessing the technical and fundamental data or the market news, you determine that the value of the dollar against the euro will rise from its current $1.098 value in the next 2 hours. As such, you will buy a call option. Remember that the $1.098 is the strike price of the dollar against the euro and that the 2 hours is the expiration time. In the event that your prediction is correct and the value of the dollar against the euro increases by the end of the expiry time, the trade would have ended in the money. In other words, your trade would have ended profitably.
The next term is expiration out of the money. As you might guess, a trade ends out the money when your wager is incorrect. This means that when you enter into a binary options trade and you predict wrongly about the movement of the price, you will lose money. This might be difficult to take in but it should not deter you from trading binary options; as you go along, you will find that most of your trades will end in the money i.e. it will end profitably.
So how does a trade end out of the money?
Let’s say you are looking to trade Facebook stock. From your market analysis, you determine that Facebook stock, which is currently trading at $82.16, will decline in the next 1 hour. In this case, you will buy a put option. Say you start your trade at 13.00GMT; this is also known as the strike time—your trade will expire at 13.59GMT taking into consideration the fact that your chosen expiration time is 1 hour. At the expiration time, if Facebook stock jumps to $84.36, your prediction would have been incorrect and therefore your trade will end out of the money.
As you improve your market analysis skills, your wagers will become more and more accurate. In summary:
· A call option is in the money when strike price is lower than the current price of the asset.
· A put option is in the money when the strike price is higher than the current price of the asset.
· A call option is out of the money when the strike price is lower than the current price of the asset.
· A put option is out of the money when the strike price is higher than the current price of the asset.