Option brokers offer binary options on a range of financial assets (also called underlying assets) including: shares of stock traded in major national stock exchanges, global stock index averages, commodities and foreign currency exchange pairs.
Below you will find a brief description of each of these financial asset classes.
Foreign Currency Exchange Rate (Forex) Pairs
I start with this one because (a.) it’s the most prevalent asset for which binary options are purchased since the forex markets are typically open 24 hours a day 5 days a week and (b.) it’s also the easiest for people without a background in finance to understand with regards to binary options trading.
Most binary options brokers offer the “major” forex pairs as underlying assets in their binary options. The major foreign currencies means the following: the US Dollar, European Union Euro, Great Britain’s Pound, Canadian Dollar, Australian Dollar, Swiss Franc, Japanese Yen and the New Zealand Dollar and their various pairs: the Euro/Dollar (EUR/USD), Pound/Dollar (GBP/USD), Dollar/Yen (USD/JPY), Dollar/Swiss Franc (USD/CHF), etc.
Some option brokers may also offer “rarer” forex pairs in their binary options such as the Turkish Lira and the Chinese Yuan.
When purchasing a binary option on a forex pair, a trader is essentially predicting whether one currency will increase or decrease in value vis-a-vis another currency in a currency pair. So, if Trader A takes an UP (Call) position on a EUR/USD binary option that pays 75% and expires in one hour’s time, Trader A is basically saying “I believe the Euro will increase in value vis-a-vis the dollar in one hour’s time.”
Likewise, if Trader A were to take the DOWN (Put) position on that same binary option, he would be saying “I believe the Euro will decrease in value vis-a-vis the Dollar in one hour’s time.”
The vast majority of forex binary options are available for purchase from midnight on Monday to midnight on Friday in the countries from which the currency is issued.
Commodities refers to natural resources such as oil, gold, and silver that are bought and sold in the global commodities market.
Most option brokers offer binary options on oil, gold and silver and some also offer binary options on more commodities such as copper, platinum, wheat, sugar and coffee.
When a trader purchases an UP (Call) binary option on a commodity such as gold with an expiry time 30 minutes in the future, it means that he or she believes that the current value of gold will increase in the next 30 minutes.
Shares of Stock
Every day, an untold number of shares of stocks changes hands throughout dozens of stock exchanges around the world. This movement causes the value of individual shares of stock to fluctuate. In an effort to allow traders to capitalize on these fluctuations, option brokers offer binary options on a variety of stocks throughout several different worldwide stock exchanges.
The most common stock shares offered as underlying assets for binary options are the stock of large hi-tech companies like Google, Microsoft, Intel and Apple as well as large multinational corporations such as Coca-Cola, Nike, McDonalds and Citigroup in the US and Rolls Royce, HSBC Holdings and Barclays in the UK.
The idea is that option brokers aim to offer binary options for the stock of companies with a prominent profile so that traders are able to use publicly available news and information to make informed decisions on binary options for the companies’ stock.
As you might have guessed, a trader who takes a DOWN (Put) position on a Google stock binary option that expires in 3 hours and pays 80% is indicating that he or she believes that a share of Google stock will decrease in value by the end of the next 3 hours.
Just as one can purchase a binary option on the value of one share of Google stock, for example, one can also purchase a binary option on the overall average of a specific stock exchange.
Most online option brokers offer binary options on the following major global stock indices: Nasdaq (US), CAC (France), Dax (Germany), S&P500 (US), Nikkei 225 (Japan), Dow Jones (US), FTSE100 (UK) and Hang Seng (China).
Additional smaller indices are typically also available as underlying assets in binary options.
Binary options for stock indices are only available for purchase during the hours that the stock index is open for trading which varies widely depending on the country and time zone.
A trader who invests $1000 in an UP (Call) binary option on the Nasdaq that pays out 81% and expires in 2 hours is indicating that he or she believes that the average of the Nasdaq stock index will increase by the end of the two hour period.
Binary options are offered on the value of stocks, forex pairs and commodities and the global stock index averages.
It’s important to fully understand how binary options function with regards to each asset class. However, once one fully understands how they work, binary options can be a great way to diversify an investor’s portfolio by investing in a short-term binary option alongside a longer more traditional investment in one of these assets.