What are Binary Options?
Binary Options are also referred to as binaries, fixed payout and digital options. Their main attributes provide a more effective and simpler method of trading compared to more traditional investment types, such as stocks, currencies and commodities. Consequently, binary options are deemed to be more suitable for novices and the less experienced trader. This is primarily because trading binary options entails just the evaluation of only two main factors by the investor, which are selecting the market direction and expiry time for the underlying asset of interest.
Simplicity is the essence of trading binary options as they are considered to be the easiest of all forms of investments to use. This is because investors understand precisely, at execution time, their exact potential for maximum profit and loss. They also only have to concentrate on evaluating just the direction in which price will travel and not the size or magnitude of its movement.
In addition, the investor does not need to perform any due diligence on the underlying asset of the option. Binary options offer other significant advantages over other forms of trading such as high payouts and pre-defined limited risk exposure. The investor also requires just a modest initial deposit in order to start trading binary options. Binary options are contracts that pay-out a pre-determined profit for a successful trade whereas they refund a portion of the initial investment for losses.
As the name infers, there can only be two possible results when you trade binary options. You will either win a pre-defined profit or you will lose a pre-determined percentage of your investment. Although binary options are based on underlying securities such as a stock, currency pair or commodity, you do not need to understand their intricacies. To activate a binary option, you must first decide the size of your investment. You then need to assess in which direction you anticipate your binary option will move.
If you evaluate that your binary option will increase in value so that its final price exceeds its opening or strike one by just one trading increment at your selected expiry time, then should open a ‘call’ binary option. If you are successful, then you can receive payouts as high as 85% of your investment. However, if the final value of your binary options is lower than its opening price at expiry then you will receive a 10% to 15% refund.
Alternatively, if you conclude that price will drop below your opening or strike price within a pre-selected expiry time, then you should initiate a ‘put’ option. Your broker will pay you precisely the same percentages as listed above for the ‘call’ option depending on your result.
The Main Advantages of using Binary Options
Pre-determined payout and limited risk exposure – The payouts from your successful binary option trades are always fixed and pre-determined. You will know precisely the potential risks and rewards of all your trades before contract execution. Very importantly, your risk exposure will be clearly defined and restricted.
Simplicity of use – You only need to predict the directional movement of your binary option and not the size of it. Consequently, your primary question is “Will my binary option finish below or above my opening price before my selected expiry time elapses?
Minimum price change required – If your binary options close just one single price tick in the correct direction before your expiry time elapses, then you will be in-the-money and your contract will pay you the full pre-determined profit.
Excellent Hedging Tool – You can use binary options as an effective tool to hedge your existing trading positions as well as your investment portfolio. In addition, they are compatible with most of the popular trading strategies and techniques.
Selection of Expiry Times –Binary options provide a greater selection of short-term contract expiration periods then other forms of trading. This important feature provides you with the opportunity to trade more frequently.
24/7 trading – Most binary option brokers permit you to trade binary options around the clock, 7 days a week. In addition, by using your broker’s sophisticated trading platform, you will find that trading binary options is quite a simple task.