The binary option, (i.e., digital option, all-or-nothing), is a new trading instrument that is different from the ordinary stock options we know in several ways. Also known as exotic options, when brokers wanted to trade stock options added fees were incurred. The Options Clearing Corporation (NASDAQ:OCC), followed by the American Stock Exchange (ASE) began offering digital trading options. Two years right after that exotic options, also termed binary options, have grown to become one of the more popular trading vehicles.
Binary options offer predetermined wins and losses, as well as payouts based on the expiry dates on the contract. The trader speculates if the underlying asset will go above or below the resistance line based on the contract expiry time. If he speculates an asset will rise, a call option is then made. A put option is made when the investor believe a stock, index, commodity, or currency will take a dip below the resistance line. The trader then gets a pre-set payout according to the original terms of the contract. If the trader speculates incorrectly he absorbs the loss.
Today's binary options brokers usually advertise ROI of 70-81% of the original investment if you are in the money. You also have the option of having a pre-set loss percentage. In both cases every asset the outcome is based on the initial investment amount on the underlying asset and the time span (hourly, 60 second, etc).
The time span through which the asset rises or falls is called the "option expiration time". So, if you trade an option and this option expires "in-the-money", you make a gain based on a pre-set payout percentage from the original investment on the underlying asset. If your stock option expires "out-of-the-money", you lose a pre-set payout percentage from your original investment as well.
Today's binary options brokers accept trades composed of stocks, commodities, market indices, or currencies. Due to binary options regulations, many binary options platforms only accept stock trades from US traders. This boggles the mind, I mean either you accept trades on all trading vehicles or find another financial niche.
The following represents an real life example of a typical binary option investment:
You wake up in the morning and earn you check out Kiplinger you make an educated guess that FB stock will drop today. So you login to your account and see that the payout for being "in-the-money" on Facebook stock is 72% and the loss stands at 81%. After doing some research, you decide to invest $5,000 on a put option for FB stock set to expire at 18:00.
By the time 15:00 has arrived, FB stock has fallen from $79 to $78.32. At the end of the day, it is trading at $78.5. In this case your put option paid off and expired "in-the-money", so you get 72%, or a grand total of $8,600 back from the original investment. However, it could have gone the opposite way and risen to $80.1 above the resistance line. In this case you would have received $1,400 back from the original investment. If this seems like financial betting to you, you better believe it.
Because of this addictive element and the simplicity involved with binary options trading, this has become a very popular form of trading. Especially with investors seeking to flee the traditional currency exchanges with fixed fees, the CYSEC licensed brokers have become more appealing.
Before you even consider trying to make money trading binary options online your need to consider having a solid trading strategy. One way to do this is to find the most effective was to hedge or manage your risk levels. There is a plethora of information out there about trading binary options online, its best to look at NADEX and the CBOE first and then start comparing them to other binary options brokers.
In all cases, opening a demo account and practicing trades in a risk free environment is always recommended. If will make you a more successful trader and build your confidence.