Like any other industry, there is a certain specific terminology when it comes to binary options. We’ve covered the basic terminology in a previous material as well, but this time we want to focus on some figurative phrases that are being used by binary options traders.
How can you be “at the money”?
The first phrase we want to talk about is the one above. “At the money” is a situation when the strike price is the same as the underlying instrument. Let’s take an actual example, so you can understand better. Let’s say you buy Facebook options at 165 US dollars/share. If after a certain period of time the price is still the time, you are at the money or ATM.
“Out of the money” refers to a situation when the strike price is different from the current price. Two possibilities could be spotted here. You are out of money, or OTM if you place a call option and the strike price is above the underlying price of the instrument, or if you place a put option and the opposite scenario applies.
“In the money” refers to a situation when the trader is actually in profit. When you are in the money or ITM, the strike price is below the instrument’s price for a call option and above it for a put option.
The payout represents the return on a percentage based on your initial investment. We can talk about payout only when you are ITM or “in the money”.
Refund is an operation that takes place when an option expires and the strike price is the same as the actual price (meaning you are at the money). This situation does not occur too often, but if it does, you will get your investment back.
These are the most important jargon terms for binary options. From now on it will be much easier for you to understand the binary options related content.