Binary Options

The foreign exchange or forex market is a wild and roiling sea of currencies. These currencies are constantly increasing and decreasing in value relative to one another. The price movements tend to be small, so traders who wish to take advantage of them use debt leverage to magnify the effects of even a tiny movement. This means that large movements make traders either very rich or very poor, depending on their prior positions. Traders can hedge against their positions in forex by using derivatives such as options contracts.

An option is an insurance policy for a position in the stock, forex or commodities markets. Options are divided into two types: call and put. A call option gives the trader the right to purchase an asset at a specified price should that price be met. A put option gives the trader the right to sell an asset if that asset drops to a predetermined level. Traders buy options contracts in order to protect themselves from unexpected adverse price movements. A long position in a certain currency can be hedged by buying put options. If the currency decreases in value, the trader’s loss will be offset by a rising put option price.

Traders can also avail themselves of exotic options. Exotic options are denoted as such due to their peculiar properties that set them apart from regular options. An example of an exotic option is a binary option. Binary options are also known as digital options or all-or-nothing options. When a trader buys a call or put binary option, he stands to receive a fixed return if the option expires on the positive side of the strike price. If the option expires on the negative side of the strike price, he gets nothing and loses the fixed price at which at bought the option.

The “strike price” is the price the trader is betting the asset will eventually reach, whether that is above or below where the asset is currently priced. Binary options can take forex trading to a new level. They open up alternative choices for buying and selling currencies that are not available elsewhere.

The primary advantage of forex binary options is the drastically reduced risk-to-reward ratio. All binary options contracts pay out a fixed amount, which is usually $100. Traders can purchase these contracts for much less, most of the time at $20 per contract and sometimes even at $5. If the trader correctly predicts the market trend, he stands to make five times his original investment at $20, and 20 times at $5. This risk-to-reward ratio makes binary forex options much more attractive than the spot market.

To achieve a comparable return in the spot market, the trader would have to move into positive territory farther than five times his stop loss. This multiplies his risk to an unacceptable and potentially unsustainable level. The spot forex market moves very quickly, and sometimes gauging the movement of a currency is difficult. Any profits the spot trader makes are usually only equivalent to their original investment. In other words, they are not being compensated for their risk.

Binary options give forex traders a new method to trade currencies without risking everything. They can invest a small amount of money for a large potential return. Many traders who discover binary options eventually quit the spot market altogether in favor of the binary options market. The advantages offered by these exotic options are simply irresistible to traders who have experienced the wild swings of the forex market. Binary options are less risky than spot currencies and even futures contracts. Traders who use them can achieve profitability much faster than normal.