Binary Options Explained

What are Binary Options and how are traders using this new financial trading product?

Binary options are one of the newest forms of trading/gambling which allow professional traders and private investors to speculate on the directional movement of certain financial assets on financial markets over the past few years and they are growing in popularity at an amazing rate. The ease in which it is possible to gamble on a financial product using binary option trading is appealing to both seasoned professionals and new comers. The binary option industry is still in its infancy in relation to standard financial trading and has been tarnished by certain unscrupulous operators as regulation was either very light or nonexistent, but times are changing for the better and at a fast pace. This is good news for private individuals who are using binary options as a new form of trading and also for the licensed reputable firms who have from the beginning approached this new industry from the correct regulated angle.

 

So why is binary option trading/gambling so different? Unlike most traditional forms of trading on financial products, such as Forex or shares, binary options have a fixed pre-determined payout that is shown before you place your bet that you will either bet correctly and be ITM (In The Money) and win or bet incorrectly be OTM (Out The Money) and loose. For example, you can place a bet on your prediction of a movement in an asset such as an Index, currency pair, commodity or a single share, there are two possible outs- comes, the price either moves up or moves down. You can predict that the asset price will either go up or down, If your prediction is correct, you’ll receive a payout that is fixed when you placed your bet if you predict correctly, If your prediction is wrong you will lose your stake money, Should the price not change which is very infrequent you will receive your stake back, It’s really that simple. You just decide on an asset, and then choose which way you think the market price will go over a specific period of time. The specified time on a binary option trade can be as low as 60 seconds, and the payout is usually around 70-80% of your investment, this means that quick profits are definitely possible. Binary Option trading can be fast paced and rewarding but there is no such thing as assured winning it takes seconds to learn how to use but hours and hours to master and even then you will not always predict the movement of an asset correctly.

 

Binary Option Definitions

 

What is a binary option trade? A binary option is a trade on the directional movement of a defined financial asset where there are only two possible outcomes.

 

1)      The selection made on the movement of an asset moves in the way predicted within a predetermined time frame is a winning selection.

2)      The selection made on the movement of an asset does not move in the way predicted within a predetermined time is a losing selection.

 

What can you trade using a binary option? In binary options there are four main financial assets that are available.

 

1)      Commodities such as Gold, Silver and Oil

2)      Forex, most major currency pairs such as GBP/USD, JPY/USD, EUR/USD.

3)      Stock Market Indices such as The Dow Jones, Nasdaq, FTSE, CAC, DAX

4)      Individual Stocks, such as Microsoft, Apple, Google and British Petroleum

 

What are the Trade Types?

 

1)      Call Option (Up Trade) this is when the selection on the direction of an assets price is for it to go up in price from when the deal strike price. Example Trader predicts gold is going up from the current $1,400 so the trader initiates a call option at $1,400 if the price of gold is above $1,400 by the expiry time it is a winning prediction and is In The Money (ITM)

 

2)      Put Option (Down Trade) this is when the selection on the direction of an assets price is for it to go down in price from when the deal is struck. Example Trader predicts gold is going down from the $1,400 so the trader initiates a put option at $1,400 if the price of gold is below $1,400 by the expiry time it is a winning prediction and is In The Money (ITM)

 

3)      Touch Option This is when a trader predicts a price of an asset will touch a predicted price in a predetermined time. Example Trader predicts gold is going to touch $1,415 at the moment it is trading at $1,400 so the trader initiates a touch option at $1,400 if the price of gold touches $1,415 at anytime up to the expiry time it is a winning prediction and is In The Money (ITM)

 

What is the Strike Price? The strike price is price of an asset when a trade is initiated.  Example: Trader predicts gold is going up from $1,400 so the trader initiates a call option at $1,400 in this instance that is the strike price is $1,400.

 

What is the Expiry Price? The Expiry price is the exact time and date at which the binary option trade expires, it will then be compared to the strike price to determine if it is In the Money or Out the Money.

 

What does In the Money mean? In The Money or ITM is a term used when a trader has a winning prediction and is due a payout hence the term In the Money.

 

What does out The Money mean? Out The Money or OTM is a term used when a trader has a losing prediction and is not due a payout hence the term Out the Money.

 

What does At the Money Mean? At the Money or ATM Is when the expiry price is the same as the strike price and so the trader is neither right nor wrong. When this occurs the traders stake money is returned.

 

What are the risks and rewards?

Binary options have a number of advantages over traditional financial trading. The trader needs to only make one simple decision; is the asset going to go up or down? This makes them very easy to understand for a novice trader and the potential risk and reward is clear to see from the offset. There is no concern as the trader never actually owns the asset and there are generally no fees relating to commissions when trading. With binary option trading growing in popularity there are more brokers offering a service with more tools available to help traders to try and make an informed selection. Like nearly all trading opportunities binary options do have their drawbacks, the overriding one being the risk involved is always greater than the potential reward. This means that to be successful trading in binary options, the trader must have a very high percentage of correct trades in order to cover any losing trades.