Out-Of-The-Money
Out-Of-The-Money
Out-of-the-Money (commonly abbreviated as OTM) is a term used in Binary Options Trading to describe a situation where the option would not yield a profit at the time of expiration if exercised immediately. This article explains in detail what Out-of-the-Money means, how it is used in binary options trading, and provides practical examples. In addition, this article covers step-by-step instructions suitable for beginners and includes internal links to widely-used keywords and related topics in binary options like Binary Options, Digital Options, and Trading Strategies.
Overview
In the context of Binary Options Trading, an option is considered Out-of-the-Money when its underlying asset price is not in favor of the position taken. For example, for a call option (a bet that the asset’s price will rise), the option is OTM if the asset’s price is below the strike price at the time of expiration. Conversely, for a put option (a bet that the asset’s price will decline), the option is OTM if the asset’s price is above the strike price. Being OTM means that the option remains without intrinsic value and, if it expires, the trader loses the premium spent for the option.
Key Concepts and Terminology
Understanding the following terms is crucial for anyone starting with binary options trading:
| Term | Definition |
|---|---|
| Binary Option | A financial option with a fixed payout that depends on a yes/no proposition. |
| Strike Price | The predetermined price at which the binary option’s outcome is determined. |
| Expiration Time | The moment the binary option ends and whether it is in-the-money or out-of-the-money is decided. |
| Call Option | An option where a trader bets on the asset's price increasing. |
| Put Option | An option where a trader bets on the asset's price decreasing. |
Practical Examples
Below are practical examples from well-known binary options brokers such as IQ Option and Pocket Option.
Example with IQ Option
Imagine you open a call binary option with IQ Option. You predict that the asset's price will increase. The strike price is set at $100. However, by the expiration time, the price only reaches $95. This means your option is Out-of-The-Money because the asset did not reach the required price level. For more details and to start your journey, you can Register at IQ Option.
Example with Pocket Option
Suppose you decide to trade using a put option on Pocket Option where the strike price is set at $50. If the asset’s price at expiration is $55, your option is Out-Of-The-Money as the asset's price moved opposite to your prediction. For further assistance and to open an account, you may Open an account at Pocket Option.
Step-by-Step Guide for Beginners
To help beginners effectively understand and use Out-of-The-Money in binary options trading, follow these steps:
1. Identify the type of option: Determine whether you are trading a call or put option. For a call option, you are expecting the price to exceed the strike price; for a put option, you are expecting the price to fall below the strike price. 2. Review the asset’s price movement: Monitor the real-time price of the asset. Use charts and technical analysis tools available on platforms like IQ Option and Pocket Option. 3. Set your strike price: Choose the strike price where you expect to see a favorable outcome. The chosen price must be strategically set based on historical data and technical indicators. 4. Monitor the expiration time: Understand that the outcome is decided at expiration. If the asset’s price doesn’t move in your favor, the option will end up Out-of-The-Money. 5. Analyze results and learn: After each trade, analyze whether the binary option ended In-The-Money or Out-Of-The-Money. This continuous learning process will help refine your trading strategy.
Practical Recommendations
Below are some practical recommendations for binary options trading:
- Always use a demo account if available on platforms like Binary Options to practice making predictions without financial risk. - Learn to use technical analysis tools to better predict market movements and make informed decisions. - Use internal links on our Trading Strategies page to explore more about successful techniques. - Regularly review historical data and outcomes to refine your exit and entry strategies in binary options trading. - Stay updated with market news and trends, as they can affect asset prices and consequently, your trade outcomes.
Conclusion
Understanding what Out-of-The-Money means is essential for every trader entering the realm of binary options trading. Mastering the concept assists in risk management and strategic planning. By following the step-by-step guide and practical examples provided, you will be better prepared to assess your trades, understand market dynamics, and potentially improve your trading results. For further insights, refer to related articles such as Digital Options and Trading Strategies.
Start Trading Now
Register at IQ Option (Minimum deposit $10) Open an account at Pocket Option (Minimum deposit $5)