There are many real life situations in which binary options make the most sense for traders. For example, you’re reading up on the day’s financial news, as usual, and you come across an article about a healthcare and pharmaceutical company that is hoping its new product will receive FDA approval in the near future.
Here is where the binary options angle comes in. If the company does receive FDA approval for its new product, its shares will go up. If FDA approval is denied, shares could plunge. In digital options trading talk these black-and-white situations are usually called binary outcomes. Either they work “one” or they don’t “0″. This is exactly how fixed returns options, or binary options work.
If the zero outcome sounds like too much to handle but you think this company’s stock might really go up, you should consider call binary options. Binary options trading allows you to increase your payoffs while clearly defining your losses. In binary options or fixed return options, the buyer (trader) enters into a contract to purchase an underlying asset at a fixed price at a predetermined time in the future. That means you are not actually buying anything, just a contract that gives you the option to acquire a security for a predetermined price on a specified date and time.
Let’s go back to our example of the healthcare and pharmaceutical company. Let’s imagine that it is currently trading at $10 per share with the possibility to rise if its product gets FDA approval within the next few days. You decide to go for binary options instead of buying the actual stock. You decide to purchase a $50 call option that will expire in two days via an online binary options platform. Binary options have fixed returns so you know in advance what your payout will be if your binary options expire in-the-money. In this case, the online binary options platform offers you a fixed return rate of 70%.
Our binary options trading scenario continues with good news. Some 40 hours after your binary options purchase, the FDA approved the company’s new product and the stock shoots up. Your binary option expires in-the-money, just as you predicted. Your return is $85. So at the end of the day, you risked $50 in binary options, received it back and earned $35 as a result of the fixed return options you purchased.
Many traders new to binary options buying ask the question “Wouldn’t I be making greater profits by actually owning stocks instead of buying digital options?” The answer is yes. If you had bought the healthcare and pharmaceutical company’s stock in the example above, you could have made higher returns, but you would have had to risk more capital in order to get a significant payoff than when you trade binary options. With binary options, you can risk smaller sums of capital and still get a worthwhile payoff without putting too much at stake. In addition, there are some binary options platforms that will pay out a 15% return on out-of-money results, which is a significant advantage to fixed return options trading.
So let’s conclude with the major benefits of binary options trading. The first benefit is the quick turnover. Binary options expire on an hourly basis, meaning your returns can pay off on the same day instead of waiting weeks, months or years to reap earnings from other forms of investments. The next major plus is that binary options trading has low entrance requirements. It only takes $100 to open a binary options account as opposed to thousands of dollars required to open a traditional options account through standard brokerage.
Another great benefit to binary options is that you don’t need to understand finance in depth to participate in fixed return options trading. All you have to do is make an “up or down” choice on the world’s most well know stocks, indices or currency pairs and decide how much you want to invest.
© 2009 – 2010, optionbinary.com. All rights reserved.