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An option is a contract which gives the buyer (known as the owner) the right, but not the obligation, to buy or sell an underlying asset at a fixed price within a specified time frame.
An underlying security is the item which is being traded. This could be stocks, commodities, currencies and indices. The fixed price at which they buy or sell at, is known as the strike price.
There are two types of binary option strategies: Call and Put.
In a call option, the owner may buy a quantity of an underlying stock at the strike price within a set time frame.
The buyer of a call option believes the market price of the stock will rise above the strike price. If this materializes, then the option (or contract) allows the owner to buy the stock at the original price which is lower than its current price. This means he can profit from buying the stock below its market value and profit from the difference.
In a put option, the owner may sell a quantity of an underlying stock at the strike price within a set time frame.
The buyer of a put option believes the market price of the stock will fall below the strike price. If this is the case, then the option allows the owner to sell the stock at the original price which is higher than its current price. This means he can profit from selling the stock above its market value and profit from the difference.
In the options market, there are both American and European options. American style options can be exercised at any time up to, and including, the expiration date and time. Whereas European options can only be exercised at the expiration date and time itself.
