Hi there. I've just heard about binary options, and I have some questions about the whole thing because I'm trying to understand how it all works, fundamentally:
* Is my terminology correct when I say, an option is basically a fixed value contract representing whether the price of an asset is going to be above or below a specific target price after the option has expired? So for example:
Current market price is $300. Option expires in 10m. Target market price is $325. If I buy this option, I choose whether I think that the price will be above $325 at 10m01s, or below $325 at 10m01s? It only evaluates the win/loss condition the moment the expiration date is hit, correct?
* How do draws work? Does the price of the asset have to be EXACTLY the price of the target at settlement time?
* Are you betting against the service provider when you buy these options? If not, are you putting the options up on a market to be listed so others come in and choose whether they wish to bet against you?
* How are the odds calculated, I presume the idea is to get as close to 50% win/loss ratio for the provider, and then take fees as profit?
* How does payment work, if you're not betting against the service provider? Because for example, if you're actually betting against other people, say you buy an option that says the price will drop from $325 in 10m, and your return is 1.9 of your purchase (the rate you were given by the service provider), where does that extra .9 come from? Does that mean when the option goes on the market, the price of your option will be .9 of what you paid to buy it? So the person on the other end will receive odds of 2.1? Correct me if my math is wrong, this is tripping me up.
As you can see, I'm probably highly confused about how this whole system functions, and what incentive businesses have for offering options to customers. From what it seems like, the providers are taking HUGE amounts of risk because they have to magically calculate odds, and if they get those odds wrong, they lose a lot of money? Maybe I'm completely off on that too. Really appreciate some guidance here, thank you.
P.S. I have no intention of trading them (for the moment), I'd just like to learn how they work.
* Is my terminology correct when I say, an option is basically a fixed value contract representing whether the price of an asset is going to be above or below a specific target price after the option has expired? So for example:
Current market price is $300. Option expires in 10m. Target market price is $325. If I buy this option, I choose whether I think that the price will be above $325 at 10m01s, or below $325 at 10m01s? It only evaluates the win/loss condition the moment the expiration date is hit, correct?
* How do draws work? Does the price of the asset have to be EXACTLY the price of the target at settlement time?
* Are you betting against the service provider when you buy these options? If not, are you putting the options up on a market to be listed so others come in and choose whether they wish to bet against you?
* How are the odds calculated, I presume the idea is to get as close to 50% win/loss ratio for the provider, and then take fees as profit?
* How does payment work, if you're not betting against the service provider? Because for example, if you're actually betting against other people, say you buy an option that says the price will drop from $325 in 10m, and your return is 1.9 of your purchase (the rate you were given by the service provider), where does that extra .9 come from? Does that mean when the option goes on the market, the price of your option will be .9 of what you paid to buy it? So the person on the other end will receive odds of 2.1? Correct me if my math is wrong, this is tripping me up.
As you can see, I'm probably highly confused about how this whole system functions, and what incentive businesses have for offering options to customers. From what it seems like, the providers are taking HUGE amounts of risk because they have to magically calculate odds, and if they get those odds wrong, they lose a lot of money? Maybe I'm completely off on that too. Really appreciate some guidance here, thank you.
P.S. I have no intention of trading them (for the moment), I'd just like to learn how they work.
Last edited:
