As you get started in the world of trading binary options, you will come across several terminologies. Two of the most common terms are expiration time and expiration rate.
What Is An Expiration Rate in Binary Options?
The expiration rate, also known as expiry rate, is the value of the financial asset you are trading, at the end of the expiration time.
So what is the expiration time after all? This is a time, in the future, when the binary option expires and the trade results are determined. It is important to distinguish between the expiry rate and the strike price. The latter, the strike price, is the initial value of the asset that you choose to trade while the expiry rate is the actual result of the trade.
At the start of a trade, you begin with the strike price of your chosen financial asset. Your binary options broker will also provide you with an expiry time, which can be as short as 60 seconds or as long as 1 month or more.
As you make the decision whether to take a call or a put position, you will also be determining whether the expiry rate of the asset will go higher or lower than the strike price, also known as the original value of the financial asset.
You will take a call position if you estimate that the expiration rate will be higher than the original value of the financial asset. Conversely, if you think the expiration rate will go below the strike price, you would take a put position.
Why is the expiration rate important?
The expiration rate will determine whether your binary options trade has been successful. If the expiration rate you use in your trade is successful, you would be said to have ended the trade ‘in the money’ meaning that you have correctly predicted the expiration rate.
On the other hand, if you do not correctly predict the expiration rate, the trade will end ‘out of the money’ meaning that you have lost the trade.
If your expiry rate is predicted correctly and you end up in the money, you can receive your profits from your broker. However, you may end up losing money in the event that your predicted expiry rate moves in the opposite direction—this is just how binary options trading works.
As you keep trading, you will learn more about signals and historical analysis to help you make your future trades more profitable.
An effective way to estimate the expiration rate correctly in most of your trades is to keep up with financial news, learn about signals and look out for historical expiration rates that will give you a picture of the direction of the market. This way, you will be in a better position to make accurate predictions for your trades.
Before wrapping up, here is an easy example to help you to better understand the meaning of expiry rates:
Let’s say you are looking to trade Apple Inc. stock and the strike price, the original price of the stock, is $112.80, which you can trade on a daily basis.
Given that you have been keeping track of the financial news, you are convinced that Apple Inc.’s stock value will rise by the end of the trading session or the expiry time. As such, you undertake a call option and by the expiry time, Apple Inc. stock jumps to $120.88. In this case, the trade would have ended in the money, so you make a profit.
If for example, you predicted that Apple Inc. stock would rise by the end of the expiry time and instead the stock value fell to $98.76, your trade would have expired out of the money.
In summary, the expiration rate essentially determines the success of your trade. Therefore, it is important to practice how to improve the accuracy of your expiry rates.
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