Binary options are trading options that require you only to predict the direction of the price movement. If your prediction is correct at the time of expiry, you will receive a fixed payoff. If your prediction is incorrect then you will lose your initial investment and will not receive any payoff. Binary options are some of the simplest trading options that are available; because as a trader you know exactly what you stand to gain, and what you stand to lose.
How Do I Trade Binary Options?
Binary options are a mass market financial instrument that allow traders to use a flexible approach without dealing with the intricacies of traditional trading options. Binary options can be used to hedge your portfolio or for short-term speculation. These options give you the opportunity to enjoy high payouts in a short amount of time and because of this, binary options are gaining popularity all over the world. Binary options contracts are available on several underlying assets including commodities, stocks, indices and currencies. When trading binary options, you will need to place a put or call option. A put option means that you predict that the price of an underlying asset will decrease from the current price at the time of expiry, while a call option means you predict that the price will increase. If your prediction is correct, you will finish ‘in the money’and make a profit. You will finish ‘out of the money’ if your prediction is incorrect. Sometimes your trade will finish ‘at the money’ which means the price of the underlying asset is the same as the time of expiry and at the time you opened the trade. If this happens you will usually be given your initial investment back.
Traditional Options vs. Binary Options
Binary options are similar to traditional options because the payoff is based on the price of an underlying asset at the expiry time. However, traders only need to correctly predict the direction of the price movement instead of the magnitude of that movement when trading binary options. The primary difference between binary options and traditional options are the gains and losses. Binary options offer a fixed rate of return and a loss of your initial investment. With traditional trading options the gains can be infinite which makes them much riskier than binary options.
Advantages of Trading Binary OptionsSome of the advantages of binary options include:
• Fast Trading – you just need to decide if the asset will close below or above the initial price
• Binary options are straightforward and easy to understand
• There is a predetermined risk
• Binary options offer a simple way to hedge your portfolio
• Payout is fixed depending on whether the trade finishes in or out of the money, allowing traders to manage and monitor their risk in a transparent manner
• Binary options can be a very effective tool to hedge any current positions
• Binary options are issued 24 hours a day, 7 days a week which allows investors to trade on a variety of different time frames. Binary options are available on many global underlying assets from many different exchanges.