In Binary Options trading the investor has to merely predict whether the price of an asset will rise or fall at the end of a given period. These include indices, currencies, and so forth. This does not depend on the actual amount of the change in the price of the asset, etc, just solely on the fact that it will rise or fall by the end of the expiry time. Binary options can be very profitable, if the trader accurately predicts whether the price will decrease or increase from the opening prices. The expiry times in binary options range from 60 seconds to several hours.
If the trader makes the correct prediction (i.e.: it is “in the money”), the profit is determined based upon a predetermined percentage, which was decided upon at the start of the “life cycle” of that particular contract. If the market does not go as the trader predicted, the investment has expired “out of the money”, hence the trader will lose the entire amount they had invested.
In other words, Binary Options trading can be summarized as “all or nothing” trading and is similar to “Under/Over” sports betting, in which the player must choose between only two possible outcomes, either win or lose. Only in binary options the trader must choose between the rise or fall of the particular asset, commodity, etc.
Types of Binary Options
The most popular type of binary options are the “high/low fixed price.” The traders must determine if the underlying asset price will increase or decreases by the end of the expiry period.
In “On Touch,” or single fulfillment binary options, it is enough for the title value to “touch” the predetermined price at least once by the end of the expiry time for it to be profitable. This could be either a lower or higher price threshold.
With “Binary Range” contracts, the trader must predict whether the asset price will be within a predetermined range of values at the end of the expiry time or not.
Example of Binary Options Trading
Suppose the traders predicts that in four hours the price of silver will be higher than the current rate, but does not have to determine how much higher the amount will be. The trader will select the “Call” time for the product (i.e. 4 hours) and the amount he wants to trade (i.e. $100) Let’s say the yield of this trade is 80% preset.
In 4 hours, if the prices of silver has risen from the current rate, regardless of how much, the investor will receive $180, $100 from the original investment put $80 in profit from the 80% yield. If the price of gold fell below the current rate at the end of the 4 hour expiry time, the investor will lose the entire investment amount.
On the same token, when investors predict the fall in the price of the asset, they must chose the “Put” option. If the market price falls the contract will expire “in the money” while if it rises it is “out of the money.”
The investor has the ability to “close” the contact before the expiry time with some trading platforms. In this instance, the yields obtained will vary with the movement of the market at that time.
Advantages of Binary Options
Binary Options have a wide variety of assets that are traded on a worldwide market such as indices, commodities, equities, currencies with low monetary requirements. This opens possibilities for those who want to invest but do not have an excessive amount of funds available to them. It is also a good market for those who are new to the world of financial trading to gain some experience with little risk involved.
The premise of binary options is rather simple. It only requires the investor to predict if a specific trade will rise or fall during the specific time, regardless of the amount of change in prices during this period. However, binary options trading are ideal for day traders as they do not physically possess the underlying asset, and they allow risk management in open stock positions through hedging, hence do not burden others investors as well. The profit potential in binary options is clearly defined at the onset of the trade and can reach as high as 100%. The amount of risk if the investor predicts incorrectly is also predetermined at the start of the transaction.
Since binary options have a short expiry time, investors are asked to limit the number of trades they place at one time. This helps avoid “dips” in their trading account, as well as additional psychological stressors.
Binary Options are believed to gain a lot of interest and popularity over the coming years as more brokerages are made available and the range of options offered increase as more and more people turn to binary options trading as a means of investment.
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