Overview of Binary Options Trading
A binary option is a type of financial derivative based on the price movements of an underlying asset. This means the while the option gets its value from the price of the security; you are never required to own it. It’s an easy way for ordinary investors to get access to the financial markets and have some great success.
With a binary option you will pick one of two outcomes. If you choose correctly and the price of the underlying security moves in your favor at the expiration time, your payoff is a fixed amount. However, if you guess incorrectly and the price moves against you, you will lose all of the money you invested in the option.
Generally, binary options are written for a fixed amount of time and the lack of a liquid market means you have to hold the option until the expiry time. However, some brokers do allow you to sell back options and also offer you some protection in the case of a losing trade.
Options are also called digital options or all-or-nothing options and are traded through special brokers due to the lack of an exchange.
The Different Types of Binary Options Trades
There are three different types of binary options available for trading on the financial market. They are:
High/Low Trading
High/Low binary options are the most common options available because they are the easiest. You simply look at the price of the underlying asset at the time that the option is written, also known as the strike price. The option is written for a specific expiry time, after which you will receive a payout based on whether the price is higher or lower than the strike price. It doesn’t matter what the price does in between. All the matters is the price at the time the option expires.
An Example
The price of oil per barrel is currently $100. You think the price will go up and so you buy a high binary option with an expiration time of one week. If one week later the price of oil is $110 a barrel, you will make a profit of roughly 80%. If the price is instead $90 a barrel, you will have to forfeit your entire investment.
Boundary/Zone Trades
Boundary or Zone options are options that require the price of the asset to stay within a particular zone or boundary defined on either side of the price of the underlying asset. For these options, you are betting for or against price volatility.
One Touch Options
One touch options are options that only require the price of the underlying security to touch the goal price once. Once the price is touched, all touch trades win and all no-touch trades lose. With many options brokers, these offer the highest payouts, but they are also the longest shot options to trade.
Payouts
For winning trades, most options brokers pay out between 75% and 90% of your initial trade. Usually a losing trade means losing the entire amount of your trade, but some brokers offer a 10% or even 15% rebate on losing trades.
Underlying Assets
One of the greatest benefits to trading binary options is that there are a wide range of underlying assets that you can trade. These assets include:
Stocks
Large cap company stocks are offered by most binary brokers. Large tech companies like Google and Apple are favorites, but bank stocks and large industrial companies are also offered.
Commodities
Nearly all binary options brokers offer gold and oil options and some offer other commodities as well, including wheat and silver.
Indices
All of the major indices are offered, including, but not limited to:
• NASDAQ
• Dow Jones
• FTSE 100
• DAX 30
• And other indices from France, Spain, and even Israel
Forex Pairs
Forex binary options are offered. But they usually are only offered between major currencies, like the Euro, Japanese Yen, and Pound Sterling, and the USD.
Regulations
Because the binary options market is so new, the market is largely unregulated. However, most companies do have to report to their national securities regulator. These include the Financial Services Commission (FSA) in the UK, the Australian Securities and Investment Commission (ASIC), and the Financial Services Commission in the British Virgin Islands.
Not all binary brokers are regulated, but you should find a broker that is. Regulators can help make sure that your financial data isn’t manipulated, you aren’t subjected to excessive and illegal fees, and that the financial services are always available.
How Options Trading Compares to Forex Trading
Binary options trading gives you the ability to make a lot bigger gains much quicker than you can in forex trading. However, there is a lot more risk involved in trading binary options. If the market moves against you, you will lose your entire investment. Because of this, it makes it much harder to turn a profit trading binary options because the amount you gain from a profitable trade doesn’t match the risk that you take for losing trades.
With forex trading, the ability to stop your losses and ride profitable market movements means you don’t have to be right about the direction the market is moving nearly as often as you do with binary options.
Binary trading is good for beginners however, because it is a lot less complicated than trading in the forex market. It also lets you trade with a lot more assets and lets you get started with a much smaller bankroll than you could in forex trading.
Pros and Cons
Binary trading isn’t for everyone. If you want to be successful, you have to make profitable trades well over fifty percent of the time. Losing trades will always cost you more than winning trades make you. Once you make a trade, many brokers also won’t let you back out of it because of a lack of liquidity in the market, so you’re stuck with your trade until it expires.
However, with binary trading it is very easy to see the risk that you are taking and it is much easier to get started. There are also generally no fees to worry about and it makes it easy to get started trading stocks, commodities, and other exotic assets without needing to have a six-figure bankroll.
Conclusion
Trading binary options is an exciting way that you can get started trading quickly and easily. While you can hop right in today, just be aware that there is no shortcut to profitability and beating the market enough to make a profit consistently will require a large amount of studying every day.
