Binary option trading, is a new way you can make money on Forex currency exchanges. It’s generally much easier trading Forex in this manner in certain respects. You won’t need to deal with anything like margin requirements, you don’t have to calculate risk/reward ratios, plus, you don’t have to determine entry or exit point.
Binary option trading is also a less risky trading practice that spot trading, as the potential loss will be limited to only the money that you commit to a trade. If you have opened a trade in forex spot trades without a stop-loss, you could potentially lose all of the money you have in a trading account.
Your risks/rewards have already been pre-ordained by a broke in any options trade. The only thing that you need to do is to predict whether your market will move up or down by the set expiration time.
It doesn’t matter at all how much the market moves at all, simply that it moves in your favor. If the market has moved in favor of your option by even one point by the expiration, the trade is considered profitable, or “in the money”.
Generally speaking, the risk/reward set by your broker is very high, which makes binary options trading a great alternative to regular forex trading. Your return on some option could be as high as 95 percent on a single BO trade, and this could happen within a span of just few minutes!
How Binary Option Trading Works
BO trading is an innovative and exciting way to profit from the different financial markets, all without needing to have a background in trading or finance. The structure is derived from the word “binary”, which means 0 or 1, the BO market is an option that is bought with the outcome known from the beginning and the result is either all or nothing. (In theory, certain brokers will return some of your money even if an option expires “out of the money”.)
You can look at a binary option trade like this: “By the time the option expires, the underlying asset will have a higher (or lower) value compared to the current position. If I am correct, then I get the pre-determined payout from my broker. If I am wrong, I get nothing or maybe a small percentage of my money back. The options broker will never ask for more.”
The Components of a Binary Options Trade
The following components make up a binary option trade:
- The underlying asset could be anything - a currency pair on forex (such as USD/EUR), a stock (Microsoft, Google), a commodity (Gold or Silver) or even an index (NASDAQ, NYSE).
- The expiration time of binary options changes depending on the particular option. Binary options could expire in as little as within the next hour, or could go through the end of the day or the end of a week. You can even find options that don’t expire for a month.
- You will be predicting the direction of the underlying asset’s movement. Up, or down. These are also known as Call or Put. Once you’ve bought the option, the price that you buy the asset at is called the strike price.
- CALL - If you buy a call option, you predict that by expiration time, your asset will go up in price.
- PUT - When you buy a put option, you’re predicting that the price of the underlying asset is going to fall by the end of the expiration.
Determining the Outcome of Your Binary Option
Once you have bought your binary option, you get to play the waiting game. You will be waiting until the expiration time for your BO to find out whether or not your prediction was right. A correct trade is known as being “in-the-money” and an incorrect trade is “out-of-the-money”.
This means that if you buy a CALL option, and it expires above the strike price, it is considered “in-the-money”. If it expires below the strike price then the option is considered “out-of-the-money”. A PUT option works exactly the opposite - if your PUT option expires higher than the strike price, then you’re “out-of-the-money” and one that expires lower than your strike price would be “in-the-money”.
As far as profit is concerned, an “in-the-money” option means that you receive the percentage payout that was offered when you bought the option. Though this varies dependent upon the broker, but your returns could get as high as 95%! Imagine that return on an expensive binary option!
As you might guess from the name “out-of-the money”, these trades should typically result in the loss of all the money invested in the trade. As stated before, however, some brokers will return a percentage of your investment, sometimes as high as 15 percent.
What Are The Advantages of Binary Options Trading?
There are many advantages to binary options trading compared to normal spot forex trades:
- They are very simple - As a BO trader, you don’t need in depth-knowledge of financial markets. This is actually a very simple way to trade, as you only have two choices on any option that you buy. You can gain enough knowledge about a particular asset by simply reading the paper and being aware of current market behaviors. All you need to do to profit from a binary options trade is to correctly predict that direction a stock might move by the expiration time - so even if you have no idea what the market is doing, you have a 50% chance of profiting.
- Binary options features a completely controlled risk. When you buy your binary option, you already know exactly how much money you’re risking should you end “out-of-the-money”, and you know exactly what you stand to gain should your option expire “in-the-money”. Again, your broker will never ask you for more money than you originally invested in your option.
- It is extremely easy, and fast, to earn a profit from your binary option. This means there is high profitability in binary options. Your payout is guaranteed as long as your option ends “in-the-money”, no matter how significant the change in market position.
- Binary options trading is highly accessible. The public finally has access to markets that would otherwise be extremely expensive. Since the public is no longer held back by restrictively high share prices or rising commodities, anyone and everyone can actively trade Binary Options. You can trade any amount of money which you choose, and the percentage of the payout is the same no matter how much money you invest. Certain brokers will even allow you to risk amounts as low as $25 on a particular binary option trade, meaning that almost anyone can get in on the excitement of trading.
Choosing the Right Binary Option Broker
One of the biggest factors that you might have to consider when choosing your broker is the level of their risk/rewards. Do you want to try your hand at high risk options and potentially make a lot of money? Or would you like to start with lower risks while you get your feet wet? The choice is up to you, but you’ll want to choose the broker that best fits your needs.
Once you’ve decided on the risk that you’re willing to take, you’ll want to look around and see who offers the best payouts. Companies like BOMarket.com will offer payouts as high as 85%, and EZ Trader offers up to 95% on their binary options. The payouts might have a lot to do with risk, so try to find the highest payout offers in your comfortable risk range.
The risk is determined by the spread between the market price and the strike price when you decide to open a binary option trade. When the spread is higher, like with EZ Trader, the risk is higher. If your binary options has a smaller spread, the risk is much lower.
Different brokers allow you to risk different amounts of money. The amount of money that you might risk can be as low as $25, and can go up quite high. You’ll want to figure out how much you’re willing to risk, and then find a binary options broker that will allow you to risk that amount.
Do your research and shop around when trying to find your binary options broker. Most of the brokers will offer different sets of tools, and you may find certain tools to be more profitable or more intuitive for you. You might also find that certain brokers have absolutely nothing that will help you out. Since you’re playing with very real money, you will want to know that you’re getting the most out of your broker so that you can enjoy your trading and make as much money as possible from it.
Binary options trading can be a fun and exciting way to make money. By doing your research and ensuring you’ve got the best tools and a broker that you are comfortable with, you will have a fun and profitable time with binary options trading!