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.

Core advantages of using binary options

Binary options are a very simple way of earning extra cash. This form of trade is gaining more popularity by the day due to its ease of earning. Here are some of the core advantages of trading Binary options:

Large variety of assets

Binary OptionsIn the world of binary options trading, there are a wide variety of financial assets that are traded day in day out. This goes on both locally and internationally. Trading Binary options locally is not as complicated as trading them internationally. You can trade locally as an individual which is quite rewarding, but to do so internationally, you require a broker. A broker is simply a mediator between someone willing to buy something and the person selling it. In this case the seller is the other country while you are the buyer. Binary options in other countries other than the USA have a fixed payout and risk. The brokers earn their income from the differences in what they pay out on winning trades and their collection from losing trades.

Little risk when going into business

Binary options are traded with very little amount of money, which is a major advantage. When trading binary options, the amount one is set to lose or to gain is set and it is up to you to decide how much you are going to go in with. You can trade as little money as you want and as much as you want, you can start on low as you get money to be able to expand your earnings. As you continue trading, you get the necessary knowledge and experience of the market, hence your confidence grows and your predictions become more accurate hence the more you earn.

It is very simple to trade

Presence of brokers has made the trade very simple due to the competition between them. In the end the main beneficiary is you, the trader. The brokers have made the process of trade very easy which is simplifying an already simple trade. This is a trade that you are bound to enjoy and reap big from.

Great and fast rewards

What more could one possibly want from a trade other than great fast returns? Expiry periods range from 15 minutes to months later up to even six months or more. You can start with small money in the quick return options and still make substantial profits as you accumulate money, maybe to bank on a huge long deal maybe a week or even months. This gives you the appropriate time to calculate and properly make your predictions.

It can be done from anywhere and at any time

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 and 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.

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