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Published On: Sat, Nov 17th, 2012

Introducing Binary Options

Binary Options are also known within the investment world as binaries, fixed payouts and digital options. They are classified by the relevant authorities to be a more stress-free and effective trading methodology compared to other investments, i.e. commodities, stocks and currencies, etc. As such, they are ideal for newbies and less qualified traders as you are just required to assess two main factors when trading binary options. These are forecasting the direction in which the price of the selected asset will proceed, i.e. down or up and selecting the most suitable expiry time.

You do not even have to undertake any extensive research into the trading performance of underlying assets, although such studies can enhance your profitability. Binary options possess extra key advantages such as high returns and reduced risk exposure. Only a minimum original deposit is required to initiate trading.  In particular, binary options are legal agreements that return a known profit when in-the-money and post refunds when out-of-the-money.

One of the most common trade types involves an up/down binary that permits you to take a position on whether a particular asset will finish higher or lower than the present level when the bet expires. Bet expiration dates can last from anything ranging a few minutes to up to a day, week or more.

Other examples include a one touch binary, where the payout is dependent on the market hitting a particular level within a pre-determined timeframe, and a boundary trade that permits you to take a view on the market staying within a pre-defined range.

Some of the providers will quote a price of between 0 and 100 and permit you to bet a certain amount per point, whereas others will display the potential payout based on your stake. The difference is simply in the way the information is presented and in all instances the position will either finish worthless or in-the-money (returning a fixed profit).

Practicalities

The price of the binary mirrors the likelihood that the event will happen. For instance, if the FTSE is trading higher for the day and the binary bet on the index closing up for the day is priced at 70-75, this would imply that the probability for the FTSE index to close higher on the day was greater than 70%.

Binaries are all-or-nothing plays so a one tick move can make all the difference between a profit or a loss. If the opening price was 30 and you bet £2 a point, the most that you would risk would be your initial stake of £60.  You can also sell binaries before the expiry date taking advantage of market volatility to take profits early or limit your loss to less than your stake.

To trade binaries you can start with as low as £100 but in practice you need a minimum starting amount of at least £3,000 to do anything meaningful.  You would have also needed to define a sensible percentage of our account balance to stake on your new trade in compliance with your risk and money management strategy, if you had one. You would have then needed to exert a professional mindset so that you did not allow your excitement scupper price action while your trade was active. However, such abilities are not simple to learn and can take quite some time to master. Preferably, you need a methodology that will allow you to streamline this involved process. Your answer exists in the shape of binary options which you can deploy as an alternative way to trade Forex.

An example of a binary options trade

John Edwards purchases an Apple Inc. option for $100 thinking the price is going to increase throughout that day. Options company XYZ offers a 60% return if John is correct. If, when the option expires, Apple have risen in price, from the time the contract was opened, John will make a 60% profit ($60). John was correct with his judgement so his trade expired ‘in the money’ – if he was unsuccessful then he would have known to be ‘out of the money’. If he was ‘out of the money’, John would have lost his $100.

The above is an example of a call option as John thought the price was betting on the price increasing. One of the great things of binary options when compared to straight forward asset purchases is that you can also speculate on the price going down. This is called a put option. Put options work exactly the same way as a call but in reverse.

Simplicity is the key ingredient of binary options trading as it is viewed to be the easiest of all investment types to deploy.  This is because you will understand precisely at opening time, the exact profit and rebate that you can anticipate collecting at expiration dependent on your result. There can only be two results utilizing binary options as implied by the term ‘binary’. You will either receive a predetermined rebate for losses or a profit for wins. To open a position, your first step is to select your deposit size. You then need to forecast in which direction your binary option will most likely progress.

You should initiate a ‘CALL’ binary option if you determine that price will climb in value so that its final value surpasses its strike price by just one trading point at expiration. If you finish in-the-money, then you will collect returns as high as 85% of your deposit. If the final value of price is beneath its opening price at its expiry time then you will lose your deposit but will obtain a rebate up to 15% of its value. In contrast, if you predict that price will plunge beneath its strike price by expiration, then you should trigger a ‘PUT’ option. Your binary options broker will pay you exactly the same profits and refunds as described above for the ‘CALL’ option dependent on your result.

Binary options are regarded as a very powerful facility to hedge both your active trades and your asset portfolio. They have also proven to be very effective when used with popular trading strategies. Newbies will, in addition, find that binary options supply a wider choice of expiry times than other commonly used investments. This particular feature will allow you to detect new trading positions more often.

You can speculate 24/7 per week on trading binary options by utilizing your broker’s advanced trading platform. Consequently, you will soon be able to confirm that binary option trading is a relatively simple investment type to learn and operate. Remember that if your binary options finish one single unit in the correct direction before expiration at least, then you will be in-the-money and will be entitled to receive a full predetermined profit.

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About the Author

- Marcus Holland has been trading the financial markets since 2007 with a particular focus on soft commodities. He graduated in 2004 from the University of Plymouth with a BA (Hons) in Business and Finance.

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