Binary options trading is a new investment venture that anyone can use to easily profit from the price movements of a wide range of dynamic stocks, indices, currency pairs and commodities. The major reason why trading binary options has become so popular as quickly as it has is because option traders only have to make one of two possible trading decisions when placing a trade – Yes or No. This dual choice is what gives this type of trading its name, and is also why most binary trades are referred to as ‘Call or Put’ trades.
As a trader, you are not required to purchase the actual asset; for example, if you are placing a trade based on the future value of gold, you only decide whether the price of gold will rise or fall in a specified time period and you simply put money on your prediction without having to buy physical gold bullion.
Binary Options Trading Defined
Because binary options are so simple to understand and to trade, they are quickly becoming among the most popular platforms in financial trading. Binary options are referred to by a large variety of names, including two-way options, barrier options, fixed-return options, digital options and all-or-nothing options, among many others. In addition, Investopedia, one of the world’s most respected trading information websites, defines binary options as:
“A type of option in which the payoff is structured to be either a fixed amount of compensation if the option expires in the money, or nothing at all if the option expires out of the money. The success of a binary option is thus based on a yes/no proposition…”
Trading options therefore offers you the unique opportunity to earn instant gains depending on the type of asset and the flavor of binary option trading you use. With a binary broker, you simply need to correctly determine the price movement that a certain asset or market will take during a particular time period to earn a profit. However, if your prediction is wrong, you can still receive up to 10% of your original investment back as a return.
Types of Binary Options
In its simplest form, binary options trading is a pure “Call/Put” wager, also known as a “High/Low” trade. However, there are other binary options flavors as well, such as the so-called “Touch / No Touch” options which can be used by more advanced traders to take advantage of typical ranging and trending behaviors of the market prices of the various assets traded. In these advanced modes of binary trading, the trader gains a competitive edge by reading and analyzing indicators and charts before making a trading decision.
- What Is A Put Binary Option?
A Put binary option is placed whenever you expect that the price of the asset or commodity you choose to wager on will be lower by the end of a particular trading period. If this happens, and the asset price does move lower, you win the trade and receive a predefined payout as a profit.
- What Is A Call Binary Option?
If you choose to place a Call option, it is in the hope that when the trading period comes to a close, the price of the asset you will have chosen, will have risen higher than its starting price. If the price rises, you then earn a profit that is predetermined at the beginning of the trading period. In effect, this makes the Call option the opposite of the Put option.
- Example of a Call / Put Trade
In this simple example of a High / Low trade or a Call/Put trade, the amount you could potentially earn by making a correct prediction on the price of oil rising within one hour is 85% of your investment. If you place $100 on your position (a Call option) and the price does rise according to your prediction, you would then win $85 in addition to getting your initial $100 back (total $185). If you lose, and the option has a 10% out of the money refund, you receive $10 but lose your initial investment.
The “Touch / No-Touch” binary options that have been mentioned above all follow a similar theme and all are structured so you can never lose more money than originally invested. This means that you do not have to worry about the financial implications of leverage or to use the complicated risk management strategies that are common among stock and forex traders. The rules of the game are straightforward, which is the major reason why binary options are so popular among both novice and professional traders worldwide.
Types of Assets That Can Be Traded With Binary Options
There are several different types of assets that are tradable with binary options. In this section, we look at some of these types so that you may better understand the different types of assets you will come across when trading options.
One of the most popular binary options among traders has indices as their underlying asset. Throughout the world, there are many stock exchanges, and an index is an average measure of whether the prices of major stocks in a particular market are generally rising or falling. Binary options trades can then be placed which predict whether a particular market index will rise or fall over a set time period.