By Darrell Martin
In a world of acronyms such as LOL, BRB and AKA, the acronym of AON may be new to you. In the trading world, AON stands for All or None.
There are different venues where All or None is used. There are All or None order types that must be filled entirely at a single price or not at all. When it comes to trading Binary Options, AON refers to the type of settlement payout at expiration where only one trader will receive the full settlement value of $100 per contract. If you’re right at expiration, you get the payout and if your wrong you get nothing, losing whatever was paid on the trade initially.
When you trade binary options, you are trading on the direction of the underlying market. You place your vote saying that the market will finish above or below a certain strike level. When the binary market closes, if you are right, you get all of the $100 per contract. If you are wrong, you get none of it. It comes down to being on the right side of the line when the bell rings. Being right pays all. Being wrong pays none.
With the binary options, the payout feature allows both parties (buyer/seller) to understand exactly what the contract is worth at expiration and what is at risk. Due to this AON characteristic, if the expiration outcome is still in question, (the underlying price is at or near the strike price), then the binary pricing can be quite volatile as the binary contract gets closer to expiration.
What can happen is a relatively small price movement of the underlying, can have a big impact on the binary pricing. You might think of it as if the binary pricing being pulled at both ends, between 0 and 100, as it has to settle at one of the points upon expiration.
In this example, let’s say you chose to buy USD/CAD>1.3180 (7PM) for $57. As you can see from the order ticket your maximum risk or initial cost is $57 and your profit potential is 43 per contract if the contract finishes in the money at expiration. Let’s say the binary expires at 1.3185, greater than the strike level so you receive the full settlement value of $100 per contract for a profit of $43.
Suppose you have the same scenario, but the market moves against you and the USD/CAD has an expiration value of 1.3175. You receive nothing at expiration and you have lost the amount you risked to get into the trade, which was $57.
Remember for the binary buyer the settlement payout is the same for an expiration value that is either a fraction above the strike or many price levels above, the payout is always capped at $100 per contract. You just have to be right.
You may not have the stomach for what can happen as you are going for all the marbles at expiration, so closing out a binary trade early is an option. Doing so lets you cut your losses or take an early profit.