Binary Options Trading

 

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.

Binary Options Trade as the Best Form of Trade

The trade of binary options is a force to reckon with especially now that it is online. This trade is very advantageous and very easy to join and actively participate. The binary option trade is simply a yes/no trade. You predict the state of the underlying assets and earn some money from the right predictions.

Advantages of the trade

This trade has an array of advantages which are very lucrative and include:

  • Minimal risk – Binary trade is a trade where you invest a minimal amount of money or a great amount of money, the choice is yours. The stock price is indicated and the payoff and the amount of money one is set to loose also indicated. The price however has an expiry time, which when reached and the state of the price is as predicted, (whether a rise or fall) you are paid off.
  • Fast huge rewards – As indicated one can trade with whatever amount of money they like. You can opt to use the short time options where the binary options expire in minutes or use the longer options where the option expires in some days, weeks or even months, these are great since you get time co accurately predict the prices. Whichever option you choose, you are assured of making huge profits in relation to your investment if the bets go your way.
  • Can be done from anywhere – Binary trade does not get better than you can do it online. Whether you are bored at work or in traffic you can just log in check for any new offers. Be it on your mobile phone, your iPad, your laptop, there are customized web applications or websites that enable you to trade at your own time.

 

Disadvantages of the trade

Trade Binary OptionsAs is life, there is nothing perfect in this world of ours. Some people seek to take advantage of this awesome trade to con people of their money. Before undertaking this luring business, one is urged to conduct proper research on the platform or the broker as to avoid getting conned. You are also urged to read through any sites terms and conditions before getting an account. Take note of clauses that may turn your huge profit into a small one or even in a loss in the long run. Also, as you start at a new exchange platform or at a new site, start with small amounts of money, money that you can afford to lose. As you start with any new broker, check his liquidity before accepting anything. If the broker is licensed, then the regulatory commission assures you of his liquidity.

 

History of the trade

This trade started as an over the counter trade with little regulation, if any at all. With the trade deemed as that of the elite traders, it was a reserve of a few. This changed in 1971 when the first structured options trading environment was created. As the years went by, the number of transactions increased as the number of regulations did so as well. In 2007 a rule was filed to have the binary options trade at the major securities exchange. The rule was accepted in early 2008 with the firms joining in the trade in May and June that year. The binary options trade has greatly improved in the recent years, mainly due to the internet which has made the trade simple with the introduction of new platforms. Brokers have also played their part in growing the trade by making it as simple as possible. In the end you the trader is the beneficiary of this wonderful trade.

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