Those interested in binary options may be operating under one simple misconception. And what is that? Simply put, you may be able to choose between Cash Settled Options and Physically Settled Options. That means you can have the cash delivered to you when the contract expires, or you may be able to actually become the owner of the underlying asset instead. There are also some contracts that pay out a cash value based on the price of the asset.
Which should you choose? For the most part, you won't actually end up with a choice as binary options by their nature are electronic and not meant for any exchange of goods. However, do be attentive to the pricing of a settlement. It can be less rewarding to use the “asset or nothing” approach, also known as the physical approach, because it could result in a lower return on investment.
For example, your binary options could be for the “cash or nothing” settlement. This would give you a fixed profit if the option paid out. To illustrate that, let's say that you chose a call option on silver that was at 70% if the price was above strike at expiration. In that case, you would earn that 70% on top of the investment. If, however, the investment was “asset or nothing”, you might get a return based on the price of the underlying asset. This commodity is priced substantially lower than the percentage on your investment would yield, and so it would prove a much less rewarding venture.
More About Settlements
Settlements are an important element of your investing choices because they are so closely related to binary options. For instance, there are European and American styles, with the latter often allowing you to exit your contract early.
Why would this matter? Here too, the option is going to allow you to enjoy some protections, but only if you understand their significance. For instance, if you are using binary options, they execute automatically at the end of the contract. Thus, if you invest in a cash settlement contract for silver, and it is a binary call option that posits silver increasing more than the strike price, silver pricing would have to go up to prevent you from losing your investment.
Let's say that your contract is for a few hours, and silver prices decline over that time. If you have an early exiting option, you may be able to limit your loss. The terms are always going to vary from broker to broker, with some not yet allowing an early exit. However, if you are involved in the European style of binary options, you won't be able to exit at all.
Know what you are getting into in terms of settlements and styles because these play a role in your strategy and your options. Enjoying a cash settlement and having the American style option for exiting early can make all the difference.
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