What are binary options?
Binary option trading is one of the newest forms of financial trading to come onto the investment scene in the last few years and involves a trader correctly predicting the correct direction of an underlying asset such as a commodity, stock, currency pair or a stock exchange index. Binary options are also known as digital options or fixed return options, fixed return is a good description as when a trader opens a trade they will know what their return will be if they predict the movement correctly. A trader when carrying out a binary option trade must decide if the price of the underlying asset will rise or fall from its current price at the expiry time. That may sound simple, but that is the whole concept of binary option trading and is why it is growing in popularity with both novice and professional traders at an amazing rate.
Why trade Binary Options?
Binary option trading may seem to be an easy way to profit in the financial world, but like all investments there is a risk. With binary options this is no different the risk is that you will lose your entire stake if you predict the movement wrongly, however if you predict the price movement correctly it is possible to get a return on your stake of up to 95%. Binary options are a fast paced trading strategy and you can win or lose in as quick as 60 seconds and this is the reason that they are growing in popularity.
Types of Binary Options
As binary option trading grow in popularity so does the number of different types of binary option trade types become available, which enables seasoned traders to select the most appropriate method for their strategy and market conditions, as well as allowing novice traders to learn the trading skills required whilst using the basic type. This enables traders of any ability to use the same trading platforms. [link to binary option trade types]
Regulation of Binary Option Platforms
Being a relatively new form of trading binary options have had a chequered history when it comes to regulation and there have been numerous cases of unscrupulous firms operating scams within this arena, but things are changing quickly and that can only be for the good for all traders.
Most binary options firms seem to be registered in Cyprus and during 2012 Cyprus changed its policy with regard to binary option and firms registered in Cyprus now have to pass strict regulatory requirements issued by Cyprus Securities and Exchange Commission in order to operate from that jurisdiction.
In Malta during 2013 they followed the lead of Cyprus and again all binary option firms registered in Malta are required to pass strict regulatory requirements of the Maltese Financial Services Authority in order to operate from that jurisdiction.
The Isle of Man is also becoming a popular destination for Binary option operators but they have taken a different approach to regulation, binary options operators have to obtain a license from Isle of Man Gambling Supervision as they deem binary option trading to be e-Gaming and not financial trading, but they do have very strict entry requirements and as such is a highly regarded location jurisdiction operate from offering a great deal of investor protection.
In the United States of America the law states that all financial contracts entered into by private investors have to go via an exchange and so there are very few operators that allow US citizens to trade on binary option platforms away from this format, as with all operators traders are against that firms book and the US have deemed that not to be transparent. In 2008 the Securities and Exchange Commission approved trading cash or nothing binary options through the American Stock Exchange and the Chicago Board of Options Exchange. In 2009 the North American Derivatives Exchange began offering binary options
In Japan the rising popularity of binary option trading has forced regulators to bring this section of financial trading under the regulatory umbrella of the Financial Futures Association of Japan and during 2013 have unveiled very comprehensive and strict requirements for platform operators in Japan.
Binary Options, Financial Trading or e-Gaming
This is a difficult question as it depends on which way you approach the world of binary options, basically it is a hybrid of both. As a trader of binary options you are aware of what your return will be if you predict correctly and so on that basis it is fixed return betting and is really no different to gambling on red or black on a roulette table, but the price of a binary option is determined by the price of an underlying financial asset and that’s where the complications lie. In the world of financial investment in order to provide dealing facilities on financial instruments you have to be regulated by a financial regulator in the jurisdiction you are operating from. So going back to roulette you have a 50/50 chance of being correct, in binary options if you are a professional trader and understand technical analysis and fundamentals on the way asset prices move the odds are more in your favour, yes you still have to make a prediction but the chances are that a professional trader will make good money out of trading binary options. On a roulette table you can’t predict if it will be red or black but you can guess, in binary options a professional trader given the right circumstances can predict if the price of an asset is going to go up or down.
Even the regulators in different jurisdictions are unsure what regulations binary options fall under, as at the moment they are regulated by both financial regulators and gambling regulators depending on where in the world the binary option platform operates from, but the trend seems to be trending more towards financial regulation.