What are Digital Options?
Digital options are an option that either pays a fixed dollar amount upon expiration, or nothing, depending upon whether or not the stated criterion was met. Since the payoff is either a fixed amount or nothing, digital options are sometimes also referred to as fixed return options (FROs) or all-or-nothing options, but they are most often referred to as binary options.
Digital options are European style options, which means they can only be traded at expiration, unlike American style options that can be traded at any time. Digital options fall into the category of "exotic options", but in reality, they’re quite simple to trade. They’re simple because you already know your profit or loss before you place the trade. You also know what is needed for the trade to result in a gain or a loss. (i.e. Did the stock move higher, or lower?)
Digital option trading is growing in popularity among retail traders because of their simplicity. A trader only needs to worry about the underlying security finishing above or below the level it was at when purchased. For example, if you think Google will go up over the course of the next hour, you can buy a digital call option on the stock that expires one hour later. If the stock is trading just $.01 higher at expiration than it was when purchased, your trade is a winner, and the fixed amount is paid to you. If Google is trading below the price at purchase, the money you put into the trade is lost. Obviously, there is a high level of profits with digital options, but there is also a high level of losses. These are very speculative investments, and not for the faint of heart.
Digital options cover a wide range of underlying securities, including individual stocks, indices, currencies, and even commodities. Another advantage is of digital options is that they are issued on a continual basis, so you can make very short-term plays. If you think that a certain stock is going to move up in the next hour, you can buy a digital call option that expires in one hour. If the stock is in the money by even just $.01, the option pays off. The payoffs for being right, even if it’s only by $.01, can be as high as 80%.
Another benefit to digital options is how accessible they are to the average trader. There are many digital option-trading platforms (brokers) in the market today. We recommend the use of Global Option for digital options trading. The new account application takes less than 5 minutes to complete, and you can fund your account with a credit card or PayPal so you can start trading immediately. With Global Option, you can put as little as $30 into a given option, you only need to deposit $100 in your account to get started, and they don’t have any account fees. You can trade as often, or as little as you’d like. If you’re interested in getting your feet wet with these very simple options, just click on the ad below.
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