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- Binary Basics – READ THIS IF YOU ARE STARTING
Binary options, once considered an exotic type of options contract, have gained wide acceptance since their listing on major exchanges since 2007. Often referred to as “all-or-nothing” options, they get their binary nature from the fact that they either pay off as set amount of a given asset or pay nothing; there is no sliding scale of value as there is with more traditional options. Because of this payoff structure, they have a different pricing structure than traditional options, giving traders an additional tool with which to approach the market.
What Are Binary Options
A binary option , as the name suggests, is an option that expires in only one of two possible states: the payoff state or the zero state. In the payoff state, the options pays out the full value of the contract in whatever the specified asset may be. If the option expires in the zero state, it means that the payoff condition has not been met and there is no payment made at all.
It is important to understand how this is distinguished from a traditional option contract. With a traditional option (use a call option for this example), if the price of the underlying security is above the option’s strike price, the option will be worth the difference between those two prices – this applies to cash settled options, but it simplifies the example. With a binary option , if the underlying is above the specified price by even a small amount, the contract pays off the full amount specified in the contract.
On the face this simplified structure seems appealing, but it is important to remember that it is easy to lose one’s entire investment if the option expires in the zero state. Because of this risk, the payoff on these types of instruments may exceed that which is available on a traditional investment. Understanding the investment is critical before one puts any capital to work.
Binary Options 101
When trying to understand how to trade binary options , it is important to understand a few critical points. First, because of the all-or-nothing nature of this type of investment, it is considered by most to be somewhat simplistic. This means that there is less to understand, but also, that the research that must be done is of even higher importance. Making a mistake in this case means that one’s entire investment will be lost.
Secondly, while there has long been an over-the-counter (OTC) market for binary options , it was not until 2007 that they were approved for listing by the SEC on major exchanges. Currently, they tend to be limited to highly liquid assets like a few stocks, certain ETFs, and currencies. They serve a very targeted market because of their unique nature, and are typically reserved for professionals. Because of the players in this market, it is even more important to understand what one is getting into before risking capital.
Third, because they trade more like European options, analysis using the Greeks is more straightforward. While this will not apply to any but the most sophisticated investors, it is worth noting. The Greeks are a series of mathematical measurements that describe the behavior of an option. They make certain assumptions that are more manageable with a binary option because of the simplified possibilities of results.
Finally, despite their availability in other markets, binary options are most common in the currency markets. This means that when entering, a new investor is not only tackling the complex world of options trading, but the global macroeconomic forces that drive the currency market. These may be a very lucrative instrument to trade, but they carry very real risk and should be thoroughly understood.
Trading binary options has become popular since it was first allowed in the United States three years ago. In the past three years, thanks to great binary options trading strategies, many men and women have been able to quit their full time jobs to stay home, travel or commit more time to volunteer work while still earning a higher salary by trading binary options on line.
Binary options strategies will work if you are able to invest the time in getting to understand the strategy. You can’t go looking for just one golden binary option strategy which will put your income on auto pilot for years to come. It just doesn’t work like that. The more time you are able to devote to educating yourself, the better your long term results will be. Here are some binary option tips to help you get a head start on your trading strategies.
One binary options trading strategy is to go for quantity. Yes, you read that correctly. Quantity over quality is better in this case. Watch the markets and take advantage of the market triggers, caused by retail investors, who cause prices to rise by acting agressively. Then, make your trade in the opposite direction and you will make money if and when the price falls. Currently gold prices are at record highs which are, in all likelihood, not sustainable for the long term. At some point in time, many people are going to make money by placing a “put” on gold. You should remember that in order to make money with binary options trading, you only have to successfully predict which direction the market will go in, not by how much. This also works the other way around. If prices are artificially low, you can go the opposite direction by placing a “call” and make your profit that way.
Another binary options strategy is to trade in liquid securities. Look for, and chose, industries and companies which are showing excellent growth and making good yields. This will involve some research to help you verify that your choices are good ones, but it’s time well spent if you end up with a tidy profit. Try buying oil options when the oil industry is booming. You’ll be reaping the benefits just like the oil companies.
Sometimes it is worth it to get in on a trade not long before it expires. This is more risky but you have the options past performance history which you can look at and make a pretty good educated guess. If it has been slowly, but consistently, going down in value with no upswings you will probably feel pretty confident that it will continue to go in that direction.
You can also hedge your option contract in order to lock in profits. If there is a price movement going in your favor, simply hedge it so that you don’t lose out. It’s not a bad thing to end it early to lock in a large profit. In binary options trading you should expect that sometimes you will leave money on the table in order to avoid the risk of losing your capital.
Use these binary option strategies to get better results over time. While there aren’t a whole lot of strategies to use, get in the habit of using them regularly so that you can feel more confident in your use of them. And remember that knowledge is powerful and will help you to enjoy better financial success in the years to come.