Your guide to Binary Options and Binary Option Trading
A binary option is a fixed return option because there are only 2 possible outcomes which are fully realized at the onset of the contract
A binary option is a contract which gives the buyer (known as the owner) the right, but not the obligation, to buy or sell an underlying security at a fixed price within a specified time frame.
The items being traded are known as underlying securities and they could be a range of products: currencies (e.g. USD/JPY), commodities (e.g. Oil, Gold), stocks (e.g. Microsoft, Coca Cola) or indices (e.g. Nasdaq, FTSE 100). The fixed price at which the owner buys or sells at, is known as the strike price.
When trading binary options, the buyer of the option chooses whether he thinks the underlying asset will hit the strike price by the selected expiration time – this could be at the end of the nearest hour or the end of the day, week or month.
The owner places a call option on his binary option trade if he thinks that at the expiration time the option will be higher than the current price. He places a put option if he thinks that at the expiration time the option will be lower than the current price.
In this respect binary option trading is extremely flexible. The asset, expiration time and predicted asset direction can be controlled by the owner of the investment who can select each one as he desires. The only unknown factor is if the asset will expire higher or lower that its existing price.
The returns from binary option trades are set from the onset of the contract. If an option expires in-the-money then a buyer will receive between 65-71% profit on the investment amount. If an option expires out-of-the-money - the buyer will receive a 15% payback on his initial investment. The certainty of binary option trading makes it a preferred method of trading for many investors since not only is the potential gain known from the offset, but more importantly the potential loss is fixed and they will not be called upon for cover an investment which ended out-of-the-money.
This is how trading binary options would work: Investor A invests $100 on a call option on Oil, with a 70% return rate, with an end of the day expiry time. The current rate of Oil is 65.9001. If at the end of the day the price of oil closes at 65.9002 or above, then Investor A will receive $170. If it closes at 65.9000 or below, then he will receive a $15 payback. The simplicity of binary option trading makes it an attractive and desired way of investing for many investors.
The difference with trading binary options to traditional trading is that in binary option trading, a buyer is just trading on the performance of an asset – they will not actually own the asset itself. For example, in a stock option trade in Microsoft, an investor is not literally buying Microsoft shares, but rather opening a contract on whether the shares of Microsoft will increase or decrease within a specified time period.
Due their uniqueness, binary options have several advantages.
They are easier to trade because only a sense of which direction the asset will move in is needed
There is a controlled risk which is known from the onset of the contract - the 2 possible outcomes are pre-determined and set by the buyer depending on how much he invests in the option
For a binary option trade to be profitable, the option must only move in the predicted direction – the magnitude of the move is not relevant hence it is easier to receive a payout
Binary option trading is extremely flexible, due to multiple expiration dates and times, the range of underlying assets on offer and the ability to trade online without the need for a broker
So, whether you are a investor new to the world of trading options or a old-time trader used to the traditional trading market, it is recommended to try your hand at the phenomenon that is binary option trading and see how it could work for you.