What are Binary Options ?
While they seem relatively new, binary options have been traded for well over a decade, though they were originally traded over the counter usually between two institutional investors, mostly hedge funds and investment banking prop desks. Retail traders had to wait until 2008 before they were granted the right to trade binary options, and since then the popularity of this asset class has gone through the roof.
What are binary options and how do they work? Let’s take a look:
What Are Binary options, it can best be summed up as a trade that offers only two distinct outcomes, either your trade finishes in the money (winner) or out of the money (loser). This is in stark contrast to traditional vanilla options where concepts such as time decay (theta), volatility, strike price, time to expiration and the like all go into the pricing.
They are a simple risk-reward proposition, which is known and clearly stated prior to entering the trade. A lot of the trading sites that offer binary options place a return percentage of anywhere between 60% to 90% for winning trades and a 0% to 15% return of capital for losing trades.Binary Options signals are usually offered on a variety of underlying assets across most trading platforms.
Stocks (otherwise known as equities) are offered across most platforms, but usually the number of stocks is limited. Stock binary options are typically only offered on the largest, most liquid names such as Apple, Google, Microsoft, Intel, JP Morgan, and the like. Technology stocks make up the majority of stock based binary options. Foreign exchange (Forex) binary options are also well represented across platforms with most major currency pairs making up the bulk of trading.Popular commodities such as Gold, Silver, Oil, Natural Gas, and Copper and Major Indexes across the globe can also be found on most binary options trading platforms.
One of the most important thing you need to be careful about, is choosing your binary option brokers. A good platform can help you to read and understand the market. You just need to follow the trend. If you use a good analysis and binary options strategy, you can make lot of profit. One more important thing, Never go against the trend.
There are few terms which are used in binary options trading.
Call Option – this is the type of binary option that traders buy when they think that the asset price will be higher than the strike price at the time when the option expires.
Put Option – just the opposite of a Call Option. Binary options traders buy it when they expect the price of the underlying asset to go below the strike price at the time of expiry.
Fundamental Analysis – a basic financial analysis method that takes into consideration global indicators (also known as macroeconomic factors) like unemployment, GDP, interest rates etc. It also examines factors that are specific for the particular company like management, underlying value and others.
Technical Analysis – this is a method that predicts future movements of asset prices in relation to historical market data. Technical analysis uses various charts that may have different chart patterns like triangles, gaps, double tops and bottoms etc.
In-the-Money is used when your binary options trade is successful at the time of expiry.
Out-of-the-Money means that the trader has not managed to predict correctly the movement of the asset price and the trade is unsuccessful.
At-the-Money is used in the rare occasions when the asset price at expiry is equal to the initial price.
Index – this is a portfolio of stocks that represent a market or a part of a market. Each index has its own calculation methodology and usually binary options traders can read a short description of all trad-able indices in the Asset Index presented on the website of every broker.
Payout is the profit that is credited to the binary options trading account if the option has expired In-the-Money. The maximum payout for the High/Low binary options is in the range 65% – 85% for most of the brokers, while the maximum payout for the One Touch binary options can get as high as 500%.
Option Builder – a special binary options trading tool that allows investors to build a binary option, based on their own preferences. When you use Option Builder you choose an asset, an expiry time and a profit/loss ratio that depends on the risk you are willing to take.
Buy Me Out – an exclusive binary options trading feature that allows you to close the position before expiration time. It is used to minimize losses in cases when the market is not favorable.
One common misconception about binary options revolves around expiration. Most people believe all binary options have a one-hour expiration time; this simply is not true. Over the past few years we’ve seen expiration range anywhere between 15 minutes on the low end all the way up to one month. While I don’t know many people who trade one-month binary options. I’m sure some have found a use for them. One of the major advantages of binary options is the short time frame and simplified payout structure so you are likely to see traders gravitate more to the one-hour binary options.
