What are Binary Options

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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.

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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.

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..

What are binary options

What is the first thing that comes to your mind when you hear the word “trading”? – It’s probably numbers, constantly changing indices, quotes and profit which is extremely hard to calculate. Another word for it is “complex”. And it was, until binary options came to market. You don’t have to be an expert in economics to trade profitably in binary options. As it is a form of investing, it is obviously still not a piece of cake – you’ll need to spend some time learning how it works and how to make accurate predictions in order to be able to make substantial profit. However, the process itself is much easier than, let’s say, Forex.

Most forms of trading imply that an investor is actually buying an asset and his profits or losses depend on the changing value of the asset over various periods of time. In Binary Options, on the other hand, no real product is bought. Basics of binary options are fairly simple: based on market tendencies and some other factors, a trader makes prediction about movement of prices of various assets, which most commonly are currency pairs, precious metals and stock.

What assets can be traded at binary options

Binary Options can be traded with various types of assets. Most commonly they are currency pairs, commodities and indices.

How binary options work

One of the reasons Binary Options have become so popular is the simplicity of the process: there are just two types of predictions that are required: a trader should decide if the price of the chosen asset will increase or decrease. He then chooses how much he wants to invest and the expiration time of the deal. A trader profits from the return rate, which is stated before the option starts – that makes the outcome perfectly clear. For example, a trader thinks that in two hours the price of EURUSD pair will be higher than at the moment and chooses to invest $10 with 80% return rate. If after two hours the price goes up, – he receives $18 to the account. If it goes down the loss is only the initial investment which is $10.

More information on the topic you can find at How to trade binary options section of our website.

What Are Binary Options Trading? – Binary Options Explained With Example

Binary Options trading are known for their simplicity and all-or-nothing nature. Moreover, a few reasons are behind to give this trading type name binary option. Options are derivative instruments. It can be traded as forex pairs, cryptos, stocks, indices, commodities, etc.

Furthermore, for traders, it is a lucrative trading type because of it’s quick and high return percentage. But, according to the research, binary traders should pay close attention to the rules of trading before diving with real money.

So, consider this article as a guideline for beginners and hence, we will keep it as simple as possible. Let us start with the binary definition first.

What Is Binary Options Trading?

Abe Cofnas is a thought leader and analyst in the financial industry. We took a line from his book to explain the actual meaning of binary.

“The binary option is called binary because it fits the condition of being either right or wrong-all or nothing.”

On the other hand, the exotic option allows a trader to speculate on the price movements of various instruments. To trade binary option, you don’t need to purchase an underlying asset.

You rather predict whether the price will increase above, or decrease below the strike price or purchase rate. The strike price is the price, at which traders trade underlying assets. Market price must increase or decrease, by the time the trade expires.

The expiry period for binary options is very diverse. The time frame starts from 30 seconds and lasts up to a year. After prediction the price, you will select the call or put option, depending on the asset price movement.

If you guess accurately, you win a payout. But the wrong prediction will give you nothing. It is required to mention that the payout rate differs from asset to asset and broker to broker.

Speaking of assets, there are multiple trading instruments that you can trade as binary options. Before selecting any pair, find some strategies and rules on how to trade binary options .

We will explain all the terms and facts of the binary option below that will give you more knowledge to understand.

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Best Binary Options Trading Guide For Beginners
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