Published On: Sun, Nov 25th, 2012

Introduction to Binary Options

Binary Options are also referred to 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 types such as stocks, currencies and commodities, etc. As such, they are ideal for newbies and less qualified traders. This is because you are just required to assess two main factors when trading binary options which 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 perform any due diligence on the underlying asset of the option, although such studies can enhance your profitability. Binary options offer extra key advantages compared to other investment types including high returns and reduced risk exposure. You also only require a minimum initial deposit in order to commence 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.

Assume that your broker has just advised you about a new prospect to trigger a long EURUSD position.  Now, what do you do? In the past, you could have struggled to trade Forex directly by using your broker’s internet-based platform. However, if you had implemented this choice then you would have been challenged by a number of involved tasks, such as calculating well-located stop-losses and profit targets.

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.

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. As the term ‘binary’ infers, there can only be two results when you trade binary options. You will either receive a predetermined profit or lose a sizeable share of your deposit. To execute an option, you must first determine the size of your deposit. 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.

You can also 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 commonly used trading methods and strategies.         You will find that binary options offer a greater selection of short-term expiration periods than other forms of investment. This attribute provides you with the opportunity to trade more frequently.

As most binary option brokers will allow you to trade binary options 24/7 using their sophisticated trading platform, you will find that trading binary options is quite a simple task. Remember that if your binary options close just one single price tick in the correct direction before their expiry times elapse, then you will be in the money and your contract will pay you the full pre-determined 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.