In recent times, we have been hearing about the terms binary options more and more. Binary options provide a simple way of trading in multiple global markets.
However, regardless of the simplicity of the concept, one needs to be fully aware of the risks and the advantages which binary trading has. In these guides, we will explain what binary options are and what you need to know if you are looking to start trading.
Even though binary options are considered exotic options, they are really simple to understand and use. The most popular option which is at the same time the simplest is the “high-low” option. Also called the “fixed-return” option, it has an expiry date/time or a “strike price”.
The expiry date/time depends on the options you have on the platform you are using. The advantage here is that the trader knows how much they are going to win or lose whatever the outcome, meaning that the rewards and the risks are known in advance. However, one thing that should be kept in mind is that the reward is always lower than the risk.
So how does this work? Let‘s say there is an asset you are making an investment on, and it is called X. Asset X has a current value of $X. The expiry time is in 2 days. If you are choosing the high-low option, you are supposed to guess which direction the asset‘s value is going to go in.
“High” means that it will raise, while “low” means that it is going to go down. If your investment is correct, you are going to be paid a fixed return, and if your investment is incorrect, then you are going to lose the entire investment you made.
Another binary option is the “call-put” option. A trader should purchase a “call” of they believe that the market is rising; if, on the other hand, the trader believes that the market is falling, they should purchase a “put”. There is a given strike price by which it can be determined if the market is falling or rising at the end of the expiry time.
For a “call” to be successful, the price must be above the strike price when the time expires. Opposite to that, for a “put” to be successful, the price has to be below the strike price at the expiry time.
The strike price depends on the trader‘s outset, together with the expiry date/time, payout, and risk.
Most brokers take the current rates of the financial products as the strike price, like for example the currency pairs or the S&P 500 index.
So to put it in simple words, you are wagering if the price at a given time will rise or fall in comparison to the current price.
Another binary option is the “range” option. The “range” option allows traders to set the range which the price is going to be in at the expiry time. Clearly, if the price is within the range, then it is a win situation; otherwise, it is a clear loss.
“One Touch” is yet another binary option which you can choose. This means that a certain asset has to hit a certain price in the given time at least once in order for the trade to be successful.
Additionally, some brokers let you set your own expiry time. As you have probably noticed so far, the expiry date/time is the key factor which determines whether you will earn money or lose your investment.
Some brokers offer its customers the opportunity to choose their preferred expiry time, which can be as low as 60 seconds, but which can also be as long as several months.
However, all traders should keep in mind that even though the payout will be bigger if the expiry time is longer, there are many things which can happen in a longer period of time.
Depending on the platform you are willing to choose, you will have different possibilities when it comes to the assets you can trade with. Usually, brokers offer such as:
Indices: Nikkei, Nasdaq, Dow Jones, etc.
Currency pairs: USD/EUR, EUR/GBP, USD/AUD etc.
Stocks: Google, Facebook, Coca Cola, etc.
Commodities: Gold, Silver, Coffee, Oil, etc.
On the market, there are many brokers who offer different advantages, but for the most of them, the pay out and the risk are fixed. Brokers earn by collecting the money of the losing trades, and by collecting the percentage discrepancy on winning trades.
Binary options are a simple way of trading in the modern world. They are simple to understand and even simpler to use; however, one must always keep in mind that there are risks involved.
Be sure you familiarize yourself with binary trading before making your debut in the field, and be sure to check out some of the video tutorials which binary brokers offer.