Binary options are a relatively new type of financial instrument that has become popular in the financial markets due to the lesser risk involved in them. Binary options are considered simple and less risky compared to the normal options. In a normal option a contract is made between two parties to transfer an asset at a fixed price before an expiry period. But in a binary option a fixed amount or nothing is transferred. This gives it the name all or nothing option.
In this type a trader pays a small amount to buy a binary option at a strike price of the underlying asset. If the price moves up or down as quoted by him and reaches the strike price at the time of expiry he gets the amount of option, else he gets nothing. A trader can bid for a lower price or a higher price according to his opinion about the price movement. Thus the trader can know the potential losses or gains in the trading of binary options before the trade ends. Thus the binary options trading involve only a limited risk. Since only a small amount of investment is needed to buy a binary option anyone can make profit by trading binary options.
The simple nature of binary options compared to other financial instruments is also a reason for its increasing popularity. The idea of binary options trading is simple and could be easily understood by any person having a basic knowledge about the financial markets. To trade a binary option the trader just needs to know the possible direction of price movement. So the trader is free from the risk of owning the asset while profiting from its price movement. The trader does not need to learn the details of the underlying asset to trade its binary option.
The simple nature of binary options has also made it a gambling tool in some countries. As a result many fake brokers and websites operate in these countries and loot the traders by offering huge profits from options trading. This makes binary options trading in some countries very risky. In many countries the binary options trading is not regulated by the securities and exchange boards but by agencies controlling gambling and gaming. So the interests of the traders are not completely protected in these countries. These possible risks should be considered by the traders who wish to do binary options trading in other countries.