Binary Trading Essentials 3 — Questions and Answers
Question 1: If a binary option offers an 80% payout, what does a winning $100 trade return in total?
- $180 (stake plus $80 profit) (Correct answer)
- $80 only
- $100 only
- $160
Correct answer: $180 (stake plus $80 profit)
A winning trade returns the original $100 stake plus the 80% payout of $80, totaling $180.
Question 2: What is a key risk that makes binary options controversial?
- The negative expected value due to payouts below 100% (Correct answer)
- Guaranteed long-term profits
- No expiry dates
- Unlimited upside per trade
Correct answer: The negative expected value due to payouts below 100%
Because winning payouts are under 100% while losses are the full stake, the long-term expected value is negative.
Question 3: A 'one-touch' binary option pays out if the price does what before expiry?
- Touches a specified target level at least once (Correct answer)
- Stays flat the entire period
- Closes exactly at the strike
- Doubles in value
Correct answer: Touches a specified target level at least once
A one-touch option wins if the underlying reaches the target price at any point before expiry.
Question 4: What does a 'put' binary option profit from?
- The price finishing below the strike (Correct answer)
- The price finishing above the strike
- Zero price movement
- Rising volatility only
Correct answer: The price finishing below the strike
A binary put pays out when the underlying finishes below the strike at expiry.
Question 5: Which regulator banned the sale of binary options to retail clients in the EU?
- ESMA (Correct answer)
- The Federal Reserve
- OPEC
- The WTO
Correct answer: ESMA
ESMA prohibited the marketing and sale of binary options to retail investors in the EU.
Question 6: On regulated U.S. exchanges, binary options are typically priced between what range?
- $0 and $100 (Correct answer)
- $1 and $1,000
- $0 and $1
- Unlimited
Correct answer: $0 and $100
Exchange-traded binaries in the U.S. trade between $0 and $100, settling at one of those values.
Question 7: What does the bid price of an exchange-traded binary roughly represent?
- The market's implied probability of the event occurring (Correct answer)
- The guaranteed payout
- The broker's fee
- The expiry duration
Correct answer: The market's implied probability of the event occurring
A binary's price reflects the market's perceived probability that it will finish in-the-money.
Binary Trading Essentials 3
If a binary option offers an 80% payout, what does a winning $100 trade return in total?