Published On: Thu, Nov 29th, 2012

Binary Options as an Investment

In recent times, binary options have captured the attention of the markets by becoming the latest investment trend. The primary reason for this development is their main inherent feature which is their simplicity of use. Consequently, many novice and less experienced traders are now using binary options as their preferred method of trading the financial markets. For example, binary options require that you just need to assess in which direction price is most likely to move without the need to evaluate the magnitude of its movement. In addition, although a binary option is created by basing it on an underlying asset, investors do not need to perform extensive due diligence on this security in order to trade successfully.

There are other important advantages to using binary options such as they involve lower risk levels than other investment types as well as generating larger payouts. You also only have to lodge a minimum deposit with your broker in order to start trading. In essence, you execute a legal contract when trading binary options so that you will know your precise expectations of profit and losses at expiration even before your positions are activated.

Simplicity is the key feature of binary options as they are considered to be the simplest of all types of investments to trade.  This is because traders know precisely at opening time their exact profit and loss expectations. They also just need to deliberate on predicting the direction of price movements and not their size or magnitude.

As the name implies, there can only be two distinctive outcomes when you trade binary options. You will either be in-the-money and collect a predefined profit or out-of-the-money and lose your deposit but receive a refund equating to a percentage of your wager. Although binary options are constructed on underlying securities, such as commodities, stocks or currency pairs, you do not need to analyze them in depth. To instigate binary options, you must first select the size of your wager. You then need to predict in which direction you expect the price of your binary option to progress.

You should initiate a ‘CALL’ binary option if you deduce that price will rise in value so that its final value will be higher than its opening one by just one trading point at expiration. If you are correct, then you can collect returns as high as 85% of your stake. If the final value of price is beneath its strike price at expiration then you will receive a refund between 10% and 15% of your wager. In contrast, if you predict that price will fall beneath its opening value at expiration, then you should activate a ‘PUT’ option. Your broker will pay you identical payouts and rebates as listed above for the ‘CALL’ option dependent on the outcomes of your trades.

The key benefits of using binary options are now described:

1.  Evaluating Price Direction

You will make a profit if a binary option finishes just a single price increment below (PUT option) or above (CALL option) its opening price at expiration.

2.   Ease of use

You just need to focus on predicting in which direction the value of the underlying asset will advance. You do not need to expend energy trying to determine the size of the movement.

3.   Predefined payout and limited risk exposure

Your binary option contracts will always advise you exactly what returns and rebates you can expect from each trade. Effectively, binary options provide you with an in-built money management strategy. As such, you will know that you possess a tool that will help to suppress your risk levels.

4.   Around the Clock Trading

You can utilize your trading platform to enable you to trade binary options 24 hours a day. As these tools have been specifically designed with ease-in-use as a top specification, trading binary options is a relatively easy affair.

5.   Powerful Hedging Abilities

Many investors use binary options as an effective technique to hedge their other active positions and investments. In addition, most favorite trading strategies integrate well with binary options.

6.   Extensive ranges of Expiry Times

Your broker will provide you with a large choice of expiry times ranging from 1 minute to over 1 month. You will therefore have more opportunities to detect quality trades as opposed to other investments types.

The above information should now have provided you with good insights into binary options and how they can dramatically simplify your trading decisions. With this new knowledge in mind, you should now be able to initiate binary options strategies much better irrespective of your level of knowledge, skills and experience.


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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.