Binary options are really gaining steam as a trading product. I ran across them when I was doing a little more research on options. I personally don’t trade options right now, but I’d like to learn more about them because I can think of ways to use options in my personal trading strategies. For example, I like to trade economic events with foreign exchange, like central bank rate changes and CPI numbers, and I could use options to potentially trade these same events. So for that reason I wanted to learn more about binary options.
What is a Binary Option
So what is a binary option? A binary option is an option that offers a fixed return, either in cash or assets. They are also referred to as fixed return options. We talked a little bit about the basics of options and even used Facebook stock options as an example. Check out those posts if you need a refresher course.
A binary option is a contract that will pay a fixed return if you are correct on the direction of the stock or asset you are trading. If you think Google’s price will increase to a certain level, you will buy a call option near expiration and if the price does go up to, or past, that level, you will win a fixed return. Today we’re going to make things simpler; how about a story?
The Miami Heat will Win the NBA Championship
Joe decides to make a bet with his friend. He’s convinced that the Miami Heat will win the NBA championship. But his friend, Jake, thinks the Boston Celtics will take it all. Joe and Jake decide to make a bet. They both put 50 bucks in. If the Heat win, Joe will win 100 dollars but if the Celtics win, Jake will take it all. (I want to point out that I’m a Hawks fan. So Jake and Joe are both going to lose their money. :D)
This simple story demonstrates how easy the concept of a binary option is to understand. You put down a fixed amount, expecting your assumption to be right. If you are right, you will win a fixed amount, but if you are wrong, you will lose everything you put in. But just because they are simple to understand doesn’t mean you can start making money trading them. There is no way to get rich quick with trading!
How to Trade Binary Options
This is obviously the most important question to answer. The first thing you will have to do is learn options trading. There are options trading companies that have options trading tutorials that will take you through how to trade options if this is the asset class you want to learn more about.
Binary options, because of their nature, are typically traded at or near expiration. Read up on trading options at expiration to get a better grasp on this type of trade.
Binary options cannot be exercised before they expire as opposed to traditional options which can be exercised at any time before expiration. They also do not give you the right to exercise for stock like traditional options do.
The next thing you will need to do is get a binary options broker. Binary options brokers will often offer binary options trading software that will help you trade binary options and assist in pricing binary options. Find a binary option broker that has a really nice pricing platform that will even give you the expected return on your position. They also offer a bonus when you open and fund your account with at least 600 dollars. Make sure you read their policy on the bonus funds.
No matter what you do, when you decide to begin trading you should do your research on the risks of trading that are involved. When trading in Foreign Exchange and Digital Options, as with any form of investment, there is a possibility that you may sustain a loss of your investment funds and therefore you should not invest money that you cannot afford to lose.
Important risk note: option trading involves significant risk.
Would you consider trading binary options?