How Binary Option Losses are Calculated

iStock_000012838187MediumIn many ways, calculating a trader’s gain or loss with binary options is much easier than doing so with investments in individual stock shares. Because profit or loss depends simply on the direction of an asset’s movement as versus a specific buy and sell price, traders do not need to concern themselves with an asset’s purchase “basis” versus its selling price. In addition, unlike many other types of investments, the gains or losses when trading in binary options are typically always considered to be short-term versus long-term.
Prior to placing any binary option trade, the amount of potential gain or loss will already be known to the trader. This, too, is unique to the binary options market. As an example, a trader may decide if the price of gold will be above $1,500 at 2:30 pm. If the trader believes that it will be, then he or she will buy the binary option. However, if the trader believes that it will not be, then he or she will sell the binary option.

The price at which the trader buys or sells is not the actual price of the metal, but rather the price is a value that lies between zero and 100. In this case, for example, if the price of gold is greater than $1,500 at 2:30 pm, then it may be priced at 40.00/45.00. (The first number is the bid price – the price at which the trader can sell, and the second number is the offer price – the price at which the trader may buy).

The bid/offer price will typically fluctuate up and down throughout the day. However, the price will always settle at either 100 (if the price of the underlying gold in this example is above $1,500 at the time of the options expiry), or zero (if the price of the underlying gold in this example is below $1,500 at expiry time).

In this particular case, the trader’s profit or loss is determined by calculating the difference between the settlement price of either zero or 100 and the trader’s opening price (the price at which the binary option was bought or sold).