Common glossary for binary options trading basics
We created this comprehensive binary options glossary to address common questions about the terminologies used throughout our site. If you have questions or concerns not addressed in our binary options glossary, please contact our Titan Trade support team for additional information.
To give you a head start on your learning process, here are some of the basic binary terms you need to know by now:. Strike Price — The current price of the underlying asset at the moment at which the option is purchased. When the option expires, the price of the underlying asset is compared to the strike price to determine whether the option has gained value in the money or not out of the money.
In-the-Money — An option is considered in-the-money if the option gains value upon expiration. In binary options, a Call option is in-the-money if the price of the underlying asset is above the strike price, while a Put option is in-the-money if the price of the underlying asset is below the strike price.
Out-of-the-Money — An option is considered to be out-of-the-money if the option loses value upon expiration. A Call option is out-of-the-money if the price of the underlying asset is below the strike price, while a Put option is called out-of-the-money if the price of the underlying asset is above the strike price. Expiration — This refers to the time and date at which the option expires.
We have linked to specific articles explaining them. For a complete list of the terminology that's used in options trading, you can refer to our Glossary of Terms. The following terms and phrases are all covered in detail on this page:. Volume in options trading is a very simple; it basically refers to the number of transactions being made that involve a particular contract. If a specific contract is being heavily traded i. If there are very few transactions involving a specific contract, then it's said to have a low volume.
The trading volume of a contract is important, because it affects the liquidity. It isn't the only factor that affects it, but it does play a significant part and, as with any form of investment, liquidity is definitely something that you should be considering when trading options.
The liquidity of an option is a measure of how easily it can be traded at the market price; high liquid means it can be readily bought or sold. Ideally you want to be trading contracts that have a high liquidity, for a number of reasons. First, the bid ask spread on highly liquid contracts will usually be much smaller than those with low liquidity, and a small bid ask spread will ultimately save you money.
You can also be confident that any order you place for liquid contracts is likely to be filled quickly and very close to the market price. While if you are trying to sell contracts that aren't very liquid you may struggle to find a buyer. The terms bull market and bear market are often used in most forms of investment, and relate to what's happening to the price of securities, or expected to happen.
When a financial market is experiencing rising prices, or is expected to, it's said to be a bull market. When a financial market is experiencing falling prices, or is expected, it's said to be a bear market. Whether there is a bull market or a bear market obviously affects what kind of investment, if any, you make. It's particularly relevant in options trading as many strategies are specifically for use in certain market conditions.
A strategy that might work well in a bear market, for example, wouldn't necessarily be suitable in a bull market. Fundamental analysis and technical analysis are the two most widely used forms of analysis that investors can use to decide what investments to make.
Their terms are commonly used when talking about buying stocks, but both fundamental analysis and technical analysis for trading any kind of financial instrument, including options. In very simple terms, fundamental analysis is about carrying out research securities to establish their inherent value. For example, you could use fundamental analysis to determine whether a particular stock is overvalued or undervalued by thoroughly researching the company. Its financial strength and any advantages or disadvantages they have in their industry are things to look out for.
Technical analysis is more about studying past performance and looking for trends and patterns that may exist in the price of a particular security. Technical analysts typically presents that all the factors that affect the price of a security are already factored into the market price, and it's more beneficial to look for patterns and trends that might suggest future price momentum. Both forms of analysis have their advantages and disadvantages, and it's largely a matter of personal preference as to which might be better for you.
A common misconception among beginner options traders is that one contract is based on one unit or share of the underlying asset. However, most options contracts actually cover multiple units of the underlying asset; for example, a call options contract based on stock in Company X may give you the right to purchase shares in Company X. The amount of the underlying asset that's covered by a contract is known as the contract size, and is typically You should be aware that the contract size affects how much you pay for it.
In simple terms, the moneyness of an options contract defines the relationship between the strike price of that contract and the current price of the underlying security. The moneyness of a contract can be described as being in one of the three states: The price of a contract is closely related to its state of moneyness, and moneyness is also relevant to most trading strategies.