The first thing a Binary Option Trader learns is the difference between a put option and a call option.
Call Options
The owner of a call has the right (not the obligation) to buy 100 shares of the underlying stock at the strike price.
For example: On June 24th 2013 Apple stock, ticker $AAPL closed at $402 a share. The $405 July call option shows a price of $14.50. If I were to purchase the July call for $14.50, then on the third Friday of January, I have the right to “exercise my option” and buy the stock for $405 a share, even if the stock is at $450 a share!
If the stock is at $450 a share, then the option will be trading at $45 per contract and no you do not have to wait until expiration day to buy the stock for $405 and then sell it for $450, you can just sell the option and pat yourself on the back for making triple your money!
During the month the price of the option will fluctuate based on the price of the stock. If the price of the stock goes up, the price of the call option will go up too. If the price of the stock goes down, the price of the call option will go down too.
The reason to buy a call option is because you believe that the price of the stock will go higher.
Put Options
The owner of a put has the right (not the obligation) to sell 100 shares of the underlying stock at the strike price.
For example: On June 24th Facebook stock is trading at $24 a share. The $23 July put option shows a price of $0.85. If I were to purchase the July $23 put for $0.85, then on the third Friday of July, I have the right to “exercise my option” and sell the stock for $23 a share, even if the stock is at $15 a share at that time!
During the month the price of the option will fluctuate based on the price of the stock. If the price of the stock goes down, the price of the put option will go up too. If the price of the stock goes up, the price of the put option will go down.
People buy put options because either they think the price of the stock will go down and they would like to profit from the fall in the stock prices.
The other reason people buy put options is to protect their stock investment. A put option is an insurance policy for your stock. How many times have you purchased a stock and over night it drops 10%. If you own a put option then you can limit your loses by having the right to sell the stock at the strike price, even though it is much lower.
Binary Options trade in a much shorter time frame. Binary options trade for 60 seconds or for a day.