The contract price is basically the price of purchasing any given binary options contract. For example, a contract may cost $30 and have a settlement value of $50. This means that the trader pays $30 to predict the movement of the option. If they are correct, they receive the full $50 payout, even if the value only changed by a penny. If they lose, they cannot get the contract price back. The contract price is the only money that the trader stands to lose if he or she predicts incorrectly.
The contract price is important not just because it is what a trader pays. When combined with the settlement price, a person can predict the probability that the option will move in the given direction and end ‘in the money’ from the contract price.
Generally, the probability of an option ending in the money will be equal to the contract price divided by the settlement price. In the above example of a $30 contract price and a $50 payout, this indicates that 30/50, or 60% of the market, believe that the price of the option will move in that direction. In addition, that initial $30 is the only amount that the trader stands to lose, while the $50 payout is the only amount that they stand to gain. These are good odds and also a sizable payout compared to many other financial markets.
An options contract with a low contract price and a high value may be tempting, but just remember: the lower the price, the less the market believes in this asset. Buying while an option is low is not always the best plan in binary options trading. However, many traders have made huge financial gains from taking risks such as these.
