Pros and Cons in Binary Options

Best Binary Options Brokers 2020:
  • Binarium
    Binarium

    Best Binary Options Broker!
    Perfect For Beginners!
    Free Trading Education!
    Free Demo Account!
    Sign-up Bonus:

  • Binomo
    Binomo

    Good Choice For Experienced Traders!

Binary Options Basics

Binary Options Types, Pros and Cons

Binary options have become very popular investment tool, perhaps due to how simple they seem to be. The name ‘binary’ hints at the fact that traders are presented with two choices. This makes them seem easy to understand, which is part of the reason why traders with fewer skills like them.

The idea is that you are predicting on which way prices in various global markets will go in a specified period of time. If you guess correctly then you claim your profit, and if you guess incorrectly, you lose your stake. That’s it!

Binary Options Basics – What are They?

One of the binary options basics you need to be aware of is that the type you’ll see traded most often is called a high-low or fixed-return option, which lets you wager on the movements of stocks, indices, commodities and foreign exchange. These options expire at a predetermined date, time and strike price. If a trader bets correctly on the market’s direction and the final price when the deal expires, they get paid a fixed amount. It doesn’t matter if the instrument has moved a little or a lot since the trade was opened, it just counts as a win, and the trader still receives that same amount. If they get it wrong, they lose their original stake.

So, you see how simple life as a binary options trader appears to be? You’re betting that a stock, index, commodity or currency pair is going to go one way or the other. If you think your asset or index is going to go up, you take what’s called a “call.” If you think it’s going to drop, then you take what’s called a “put.” A call makes money when the instrument is trading higher than the strike price. A put makes money when the instrument is trading lower than the strike price when the deal expires. The broker lets you know what the strike price, expiration date, payout, and risk are when the trade is first set up. With the majority of high-low binary options traded beyond US borders, the strike price is usually the current market price of the asset or index.

US Binary Options vs. Overseas Binary Options

In countries outside the US, binary options usually pay out a set amount and bring a set level of risk. It’s also brokers who offer them directly instead of an exchange. The brokers make their money by taking in more on losing trades than they pay out on winning trades. Apart from certain exceptions, these financial instruments will usually be held until the date of expiry.

US Binary options listings were first made available by the Chicago Board Options Exchange (CBOE) in 2008, which is regulated by the SEC.

These options can be traded at any time, with the rate sitting somewhere between one and a hundred, depending on how likely each one is to make or lose money. On-screen, the trader sees a totally transparent deal and is free to cut their losses or walk away with their profits before the expiry time if they want to.

A trader may also choose to enter while the rate is fluctuating, in order to take advantage of different risk-to-reward situations, or hold until the trade expires, closing the position at the highest amount of gain or loss as compared to what it was when they entered.

Best Binary Options Brokers 2020:
  • Binarium
    Binarium

    Best Binary Options Broker!
    Perfect For Beginners!
    Free Trading Education!
    Free Demo Account!
    Sign-up Bonus:

  • Binomo
    Binomo

    Good Choice For Experienced Traders!

Since US binary options are traded on an exchange, this means that every trade takes place between a buyer and a seller who are willing to enter into this arrangement with each other. To make its money the exchange adds a fee that matches counter-parties.

Example of a High-Low Option

In this example, you believe that the NASDAQ index will rally for the duration of the trading day, so you purchase an index call option. The index is currently trading at 1,700, so you’re betting that when your trade expires it will be sitting at a higher number. You have a huge amount of choice when it comes to selecting when you want that expiration time to be. You could choose minutes away, or you could settle for months. It all depends on what your analysis points to. If it suggests that 30 minutes from now would be the best time, then you can choose that. This ‘for example’ deal will pay out 60% on top of your original stake if the NASDAQ rises above 1,800 at that time. If it drops to less than that then you will lose your stake. Minimum and maximum stakes vary from broker to broker.

Let’s say you invest $100 in the call. Expiration is in 30 minutes. The NASDAQ price at expiration is where the clock stops and determines whether you win or lose. The price at expiration could be the last quoted price, or the (bid+ask)/2. Every broker will have their own price rules about expiration.

With this example, we’re assuming that the last quote on the NASDAQ before expiration was 1,703, which means you get a $120 profit (because that’s 60% of $200). You also get your original $200 investment back as well. But if the price at expiration had been 1699 you would kiss your original $200 goodbye.

In the event that the price on expiration is exactly the same as the strike price, the trader usually gets their money back, although you should check with individual brokers to be sure of what their rules are. Any profits that you make will be added to your trader count automatically as soon as the position is closed.

Other Types of Binary Options

This example is for a typical high-low binary option—the most often traded binary option outside the US, but international brokers will usually offer a whole host of other types of binaries too. Here are two examples:

  • “one-touch” options. The asset you’re trading needs to hit the strike price only once before expiration to make you some money. Targets are set above and below the present price, so traders can pick which one they think the price will hit before the expiration date and time.
  • “range” options. The trader defines a price range that the asset will trade inside until expiry. You win if the price doesn’t step outside this range. You lose if it does.

With a lot of brokers competing in the binary options arena, some have taken to offering products that give payouts between 40% and 400%. Many will have different structures and requirements, but you’ll always know the elements of risk and reward before you embark upon the trade. This potentially means you can make a lot of money from your investment, but brokers don’t give money away, so with such big headline figures, chances are you won’t.

In contrast to US binary option brokers, there are some foreign brokers who will permit traders to exit positions before they expire, but most don’t. Doing this before a position expires usually means the broker won’t pay out as much, or you’ll suffer a modest loss, but not have to give up the whole investment.

The Pros and Cons of Binary Options

You’ll always know the risk and reward ahead of time, which eliminates a huge amount of doubt. And you’ll always know how much you’re going to win or lose because both amounts are fixed. No trader likes unforeseen surprises, so this is a big plus for this kind of trading. Another one is the fact that there are often no fees or commissions to be paid.

Simplicity is obviously a factor because you’re essentially tossing a coin and placing a wager on heads or tails. The asset either goes up or it goes down.

You also don’t need to worry about liquidity, because as a trader you won’t be taking ownership of any underlying asset.

Brokers can offer endless strike prices and expiration times and dates, so there are lots of choices. It’s also worth bearing in mind that at any time of the day or night market is open somewhere doing a roaring trade in many different asset classes..

A Guide to Trading Binary Options in the U.S.

Binary options are financial options that come with one of two payoff options: a fixed amount or nothing at all. That’s why they’re called binary options—because there is no other settlement possible. The premise behind a binary option is a simple yes or no proposition: Will an underlying asset be above a certain price at a certain time?

Traders place trades based on whether they believe the answer is yes or no, making it one of the simplest financial assets to trade. This simplicity has resulted in broad appeal among traders and newcomers to the financial markets. As simple as it may seem, traders should fully understand how binary options work, what markets and time frames they can trade with binary options, advantages, and disadvantages of these products, and which companies are legally authorized to provide binary options to U.S. residents.

Binary options traded outside the U.S. are typically structured differently than binaries available on U.S. exchanges. When considering speculating or hedging, binary options are an alternative—but only if the trader fully understands the two potential outcomes of these exotic options.

Now that you know some of the basics, read on to find out more about binary options, how they operate, and how you can trade them in the United States.

U.S. Binary Options Explained

Binary options provide a way to trade markets with capped risk and capped profit potential, based on a yes or no proposition.

Let’s take the following question as an example: Will the price of gold be above $1,250 at 1:30 p.m. today?

If you believe it will be, you buy the binary option. If you think gold will be below $1,250 at 1:30 p.m., then you sell this binary option. The price of a binary option is always between $0 and $100, and just like other financial markets, there is a bid and ask price.

The above binary may be trading at $42.50 (bid) and $44.50 (offer) at 1 p.m. If you buy the binary option right then, you will pay $44.50. If you decide to sell right then, you’ll sell at $42.50.

Let’s assume you decide to buy at $44.50. If at 1:30 p.m. the price of gold is above $1,250, your option expires and it becomes worth $100. You make a profit of $100—$44.50 = $55.50 (minus fees). This is called being in the money. But if the price of gold is below $1,250 at 1:30 p.m., the option expires at $0. Therefore you lose the $44.50 invested. This called out of the money.

The bid and offer fluctuate until the option expires. You can close your position at any time before expiry to lock in a profit or a reduce a loss, compared to letting it expire out of the money.

A Zero-Sum Game

Eventually, every option settles at $100 or $0—$100 if the binary option proposition is true and $0 if it turns out to be false. Thus, each binary option has a total value potential of $100, and it is a zero-sum game—what you make, someone else loses, and what you lose, someone else makes.

Each trader must put up the capital for their side of the trade. In the examples above, you purchased an option at $44.50, and someone sold you that option. Your maximum risk is $44.50 if the option settles at $0, and so the trade costs you $44.50. The person who sold to you has a maximum risk of $55.50 if the option settles at $100—$100 – $44.50 = $55.50.

A trader may purchase multiple contracts if desired. Here’s another example:

  • NASDAQ US Tech 100 index > $3,784 (11 a.m.).

The current bid and offer are $74.00 and $80.00, respectively. If you think the index will be above $3,784 at 11 a.m., you buy the binary option at $80, or place a bid at a lower price and hope someone sells to you at that price. If you think the index will be below $3,784 at that time, you sell at $74.00, or place an offer above that price and hope someone buys it from you.

You decide to sell at $74.00, believing the index is going to fall below $3,784 (called the strike price) by 11 a.m. And if you really like the trade, you can sell (or buy) multiple contracts.

Figure 1 shows a trade to sell five contracts (size) at $74.00. The Nadex platform automatically calculates your maximum loss and gain when you create an order, called a ticket.

Nadex Trade Ticket with Max Profit and Max Loss (Figure 1)

Platform Analysis: Pros and Cons of IQ Option’s Autoclose Feature

Knowing when to take profits isn’t always easy. Technical targets are one method, the autoclose feature is another but both come with risks that can cost you money.

Profit targets or autoclose, you be the judge

Knowing when to take profits isn’t always easy. Technical targets are one method, using an autoclose feature like the one at IQ Option is another. Both methods seek to lock in and maximize profits, but both come with risks. On the one hand a technical target may not be reached, or it may be exceeded, and on the other an autoclose may trigger well before a move is done costing you percentage points of unrealized gains.

Technical Targets – Technical targets are price levels on the charts at which prices can be expected to halt or reverse, or price levels a move is projected to reach based on past price movement. What I can say for these targets is that, over the 12+ years I have been trading and chart watching I’ve seen these targets hit time and time again.

Example of a technical target on the EUR/USD price chart

The only downside is that the time it takes for prices to reach those targets and what happens after they are reached is uncertain at best. This means that successful traders will have to sit and wait, watching for prices to reach their projected levels and decide; do I sell, or do I wait. If you sell you lock in profits and if you wait, you gamble on keeping what you have already worked hard to earn.

The Autoclose Feature – Autoclose is one of the most useful tools of the successful trader. It’s most important function is as a stop-loss. By setting the autoclose to sell out at a loss of 10%, 20% or 30% traders can protect their capital and live to trade again another day. Without it traders risk losing 100% of their trades as they watch prices move in the wrong direction and wrestle with the decision to close out. What many traders do not realize is that the IQ Option autoclose has two settings; the first is for stop-loss, the second is for taking profits.

Pros and Cons

  • Pros of Autoclose – When a trader sets the take-profits to close a trade they are taking all emotion out of the decision. When profits reach a satisfactory amount, the trade is closed no questions asked. This means they don’t have to sit by and watch the trade freeing them up to do other things. Another pro is that it only takes one touch of the target level for the trade to trigger. This means that if prices are volatile and only reach the target level for a brief period the trade will close.
  • Cons of Autoclose – When it comes to auto closure there is only one drawback, it can cost you money. I know that as many times as I’ve seen my profit targets reached I’ve seen them exceeded. This means that potential profits are often far greater than what I think is reasonable to expect. Setting the take-profit may guarantee a portion of the profit but it could cut you off from maximum profits.

How to use the autoclose feature

Using the autoclose feature is very simple. All you must do is set it to the percent of your capital that you want to protect in the event of loss or lock-in in the event of gains. A good rule of thumb for the stop-loss is 3% of the total account. If your total account is $10,000 then 3% of your account is $300 so set the stop-loss on every trade so you lose no more than $300. I like to set it so that my 3% of account is equal to about 30% of the trade. This means, in a $10,000 account, trades of $1000 are acceptable because you will only be losing $300 if it should fail.

Taking profits is a little more difficult but only because you want to lock in the most profits you can. I set my initial profit target at 50%. This means that if the trade should move up quickly and hit 50% I make $500 (assuming the $10,000 account balance). If prices begin to move in my direction but don’t hit my take-profit I then begin to adjust based on market conditions. The first thing to do it too slow raise the stop-loss to lock in more of your capital as the trade moves in your favor. The next thing to do is asses the technical targets for profit and the likelihood they will be reached; if necessary raise the take-profit limit to suit.

NOTE: This article is not an investment advice. Any references to historical price movements or levels is informational and based on external analysis and we do not warranty that any such movements or levels are likely to reoccur in the future.
In accordance with European Securities and Markets Authority’s (ESMA) requirements, binary and digital options trading is only available to clients categorized as professional clients.

GENERAL RISK WARNING

CFDs are complex instruments and come with a high risk of losing money rapidly due to leverage.
87% of retail investor accounts lose money when trading CFDs with this provider.
You should consider whether you understand how CFDs work and whether you can afford to take the high risk of losing your money.

Best Binary Options Brokers 2020:
  • Binarium
    Binarium

    Best Binary Options Broker!
    Perfect For Beginners!
    Free Trading Education!
    Free Demo Account!
    Sign-up Bonus:

  • Binomo
    Binomo

    Good Choice For Experienced Traders!

Like this post? Please share to your friends:
Best Binary Options Trading Guide For Beginners
Leave a Reply

;-) :| :x :twisted: :smile: :shock: :sad: :roll: :razz: :oops: :o :mrgreen: :lol: :idea: :grin: :evil: :cry: :cool: :arrow: :???: :?: :!: