Binary Trading Facts 3 — Questions and Answers
Question 1: What characteristic makes binary options different from traditional vanilla options?
- Fixed payout and all-or-nothing outcome (Correct answer)
- Ability to exercise early at any price
- Unlimited profit potential
- No expiration date
Correct answer: Fixed payout and all-or-nothing outcome
Binary options have a fixed all-or-nothing payout, unlike vanilla options whose value varies continuously.
Question 2: If a binary option costs $40 on Nadex and finishes in the money, what is the trader's gross profit?
- $60 (Correct answer)
- $40
- $100
- $140
Correct answer: $60
An in-the-money contract settles at $100, so profit is $100 minus the $40 cost, equaling $60.
Question 3: What does 'expiry time' refer to in binary options trading?
- The moment the contract settles and outcome is determined (Correct answer)
- The time the market opens
- The deadline to deposit funds
- The broker's trading hours
Correct answer: The moment the contract settles and outcome is determined
Expiry time is when the option settles and the in/out-of-the-money result is locked in.
Question 4: Many unregulated offshore binary options brokers have been associated with what problem?
- Fraud and refusal to return funds (Correct answer)
- Excessive regulatory paperwork
- Overly conservative payouts
- Mandatory long-term holding
Correct answer: Fraud and refusal to return funds
The CFTC and SEC have warned that many offshore binary brokers engage in fraud and refuse withdrawals.
Question 5: A 'put' (or 'low') binary option is profitable when the underlying price does what at expiry?
- Settles below the strike price (Correct answer)
- Settles above the strike price
- Equals the strike exactly
- Has high trading volume
Correct answer: Settles below the strike price
A put/low binary pays out when the underlying finishes below the strike price.
Question 6: What underlying markets can binary options commonly be based on?
- Forex, indices, commodities, and stocks (Correct answer)
- Only real estate
- Only government bonds
- Only cryptocurrencies
Correct answer: Forex, indices, commodities, and stocks
Binary options are offered on forex pairs, stock indices, commodities, and individual equities.
Question 7: What is the term for the price of a binary option, which also reflects its implied probability of finishing in the money?
- Premium (Correct answer)
- Strike
- Spread
- Margin
Correct answer: Premium
The premium (cost) of a binary roughly reflects the market's implied probability of an in-the-money finish.
Binary Trading Facts 3
What characteristic makes binary options different from traditional vanilla options?