Binary Options Basics: What Is An Expiration Time?
An expiration time in binary options is the predetermined moment when a trade ends, determining whether you profit or lose based on the asset's price at that specific time.
The concept of expiration time plays a vital role in binary options trading. This component is the moment when an option's fate is sealed – it will either expire "in the money" with a profit or "out of the money" resulting in a loss. The expiration time is the proverbial ticking clock that can make or break your trade, and mastering this aspect is essential for better decisions.
This article delves into the significance of expiration times, the various types available, and how to choose the right one to increase your favorability in binary options trading.
Start binary options trading right now with Pocket Option!What is an expiration time in binary options trading?
Binary options expiration time is the specific date and time when the option contract ends.
It plays a crucial role in determining whether the trader profits or not, as the asset's price is compared to the strike price at this moment to determine the outcome.
Example
You decide to trade a binary option on a company’s stock, which is currently priced at £100.
You choose a "Call (Buy / Higher)" option with an expiration time of 1 hour and a strike price of £105.
If the stock price is above £105 when the option expires, you'll profit. Let's say the stock price reaches £110 at the expiration time.
Profit Calculation
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You invested £100 in the option.
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The payout for a successful trade is typically 80% of your investment.
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So, you'll receive £80 in profit (80% of £100).
Here, with an expiration time of 1 hour, your binary option trade on company stock resulted in a profit when the stock price was above the strike price at the specified expiration time.
(The 80% payout rate in this example is a simplification for illustration purposes.) In actual binary options trading, the payout rate can vary between different brokers and specific options.
How does the expiration time affect binary options trading?
The expiration time in binary options trading affects trading in several ways:
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Time Horizon. It decides the length of time an investor has to hold an option contract. Shorter expiration times require quicker decision-making and immediate results, while longer expiration times allow for a more extended investment horizon.
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Option Price. Options with longer expiration times often have higher premiums because they offer more time for the underlying asset's price to move in a favorable direction.
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Risk and Reward. Shorter expirations may offer higher potential returns but come with increased risk, while longer expirations provide a more extended window for price movements, reducing risk but offering lower returns.
Types of expiration times
In binary options trading, there are two primary types of expiration times:
Fixed expiration times
These are pre-determined by the broker and are the most common type of expiration time in binary options. You can select from the predefined time intervals offered by the broker, such as 15 minutes, 1 hour, or end-of-day options.
The fixed expiry time, which is 1 minute.
Flexible Expiration Times
With flexible expiration times, you have the autonomy to choose the expiration time that aligns with your trading strategy and expectations. This flexibility allows for a more customized approach to binary options trading, as you can set desired timeframes, within certain limits provided by the broker.
Choosing an expiration time
When choosing an expiration time for binary options trading, the following factors have to be considered:
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Investment goals. Align the expiration time with investment objectives. Are you looking for short-term gains or long-term investments? The chosen time should match the goal, whether it's quick profits or a patient approach.
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Risk tolerance. Shorter expirations often come with higher risk, as price movements can be more unpredictable, while longer expirations may offer more stability but potentially lower returns. So, the selected expiration time should match the risk tolerance.
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Market conditions. Assess the current market conditions and volatility. High volatility might be more suitable for short-term expirations, while stable markets could favor longer expirations.
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Asset type. Different assets may behave differently over time. Consider the unique characteristics of the underlying asset when selecting an expiration time.
Conclusion
Comprehending the significance of expiration time in binary options trading is needed to achieve success in this financial market. You can optimize the strategies and manage risk more effectively by selecting the right expiration times.
For further insights into binary options trading, we recommend reading the article Are Binary Options Real? It provides guidance for traders looking to enhance their understanding of binary options trading.
FAQs
How does time to expiry affect option price?
The price of an option is influenced by the time remaining until expiration. As the expiration date approaches, the price of the option may decrease, especially if the option is out of the money. This is because there is less time for the underlying asset's price to move in a favorable direction.
What happens when a long option expires?
When a long option expires, it becomes worthless if it is out of the money. However, if the option is in the money, it may be automatically exercised, resulting in a position in the underlying asset or a cash settlement, depending on the type of option.
Are long-term options more expensive?
Long-term options tend to have higher premiums compared to short-term options. This is because they offer more time for the underlying asset's price to potentially move in a favorable direction, and there is a higher probability of the option ending in the money.
Is it better to buy options with a longer expiration date?
The choice between short-term and long-term options depends on your trading strategy, goals, and risk tolerance. Long-term options can provide more stability and time for price movements to develop, but they may tie up your capital for an extended period. Short-term options offer quicker results but come with higher risks. The decision should align with your specific trading objectives and analysis of market conditions.
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Team that worked on the article
Upendra Goswami is a full-time digital content creator, marketer, and active investor. As a creator, he loves writing about online trading, blockchain, cryptocurrency, and stock trading.
Dr. BJ Johnson is a PhD in English Language and an editor with over 15 years of experience. He earned his degree in English Language in the U.S and the UK. In 2020, Dr. Johnson joined the Traders Union team. Since then, he has created over 100 exclusive articles and edited over 300 articles of other authors.
Mirjan Hipolito is a journalist and news editor at Traders Union. She is an expert crypto writer with five years of experience in the financial markets. Her specialties are daily market news, price predictions, and Initial Coin Offerings (ICO).