Binary options trading have become as officially recognized financial tool in 2008. Instrument has been adopted by the Commission Securities and Exchange Commission. After that fact the trading on the financial markets has become accessible even for those who have never encountered with trading.
By trading with binary options you get access to the four financial markets – currency market (the so-called Forex), stock market, market indices and commodities. But a misconception exists that there is a common binary options market. A binary option central exchange does not exist, so binary option trading is over-the-counter derivative securities trading.
Binary option – what is it?
Option is a deal (you can find another definition – a contract) between the client (trader) and brokers (which generates and sells an option), and which can bring profit to the owner of the option in the case of certain conditions. “Binary” literally take place from word “two” and therefore binary option is a deal, that can have only two possible outcomes – either you have earned the profit or lost the investment. Therefore it is often referred to binary options deals as “all or nothing”.
Types of options
The most common option is the option contract in which you make a forecast for the price of asset – the asset price after a certain period of time (or to a certain point) will be higher then now or smaller. In the first case the deal is happen, if you anticipate growth of asset for which you get the option. Option, when it is expected growth of the asset price, called as option “higher” or “CALL” (you can find also the word “UP”).
In the second case, the trade is made on the condition that the asset price will fall. Option, when forecast expects the price reduction called as “UNDER” option, or “PUT” (“DOWN” name also exists).
Binary option characterized by the following features:
- base asset existence
In binary options trading you can trade in four different financial markets and, consequently, with four various types of assets – currencies, indices, stocks, commodities. Remember that you do not become the owner of a certain quantity of gold or shares of Apple (so, do not ask for dividends). You get a contract that will bring you “dividends” (pre-agreed profit) only if all the prescribed conditions will be realized.
- a predetermined price of the option
The option price is an amount that you put into position. This is the one of the most important trading items. The more you invest, the more you can receive, or lose. However, in contrast to the same risks of loss of your Forex investment your loses in binary option trades are limited and predetermined. You can not lose more, even in the case of a dramatic price movement of asset. If you invested $ 10 into the contract, it is the maximum amount that you can lose. The rest of your deposit is left inviolable in your trading account.
- a predetermined end date of the option – expiry time
Opening the position, you must specify (or select) the end time of the contract. That is the price at the time of the end of the contract (so-called Stock price) will be compared with the starting price (Strike price), to determine will you get the profit or loss your investment. Term for option trading can last from minutes to several months. Thus, an expiration period you are choosing depends on your trading strategy. The most common options are intraday options that are opened and closed in one day.
- a fixed percentage of profit that you will receive if the prediction will be successful
Before the option contract opening, the trader knows, what percentage of the investment he can get on his investment in the option. Option profitability depends from broker and option type and may vary for various brokers. When we wrote this, the profitability of options was from 70% to 1500% (a new option “ladder”). It is worth to note that now the conditions for options trading are very attractive. Our analysis of the industry suggests that the profitability of the options can no longer increase at the same pace as in 2013-2014, when it was a serious argument in the competition for customers and their deposits. Probably in the next few years we will see a slight pullback to yield 60-80%.
Advantages of binary options trading
Trading with binary options is really much easier than trading in other financial market.
For comparison, let’s compare it with trading at the stock market.
As a rule, the investor acquires the asset by investing a certain amount of money in it. If an investor sells an asset at a price that is higher than the purchase price, it makes a difference in price. If the price at the time of sale below the starting price – the investor loses part of the funds having the risk to lose the entire capital. This method requires the constant attention of investors to the market, to its smallest changes. An investor should buy an asset and sell it in time. But this is more related to speculative behavior. Do not miss out the dividends that are paid for the shares. Sometimes the solution to capitalize the profit is accepted; in this case the dividends will be 0%. In general, dividends do not give such profit that you can get in more risky markets, including binary options.
Principle of options trading is much simpler and differ from all other methods of trading due to several important criteria:
- You do not buy an asset, you’re only doing forecast of it value change in the future
- You do not risk all your balance, but only the part of it, invested in the option
- You do not need to follow the open position, as positions are closed automatically at a set time
- You do not care how many points the price has passed. Profit is not depending on it. Only the direction is important. You’ll get a fixed income, the amount of which is known in advance.
Problems in trading with binary options
Binary options trading have pluses and minuses. We do not list them all, but the main ones:
- The industry is relatively young. But it is very “wild”. Customers are attracted here “by hook or by crook”. Internet is teeming with guaranteed strategies. There is promised a hassle-free income to all. It is very difficult to give up a trip to Hawaii, if the only thing you should do is to make a small deposit of $ 200 and within a month you will sit on the beach and will be welcomed with the word “Aloha!”
- The risk of your investment loss is not limited with unprofitable trading. It is necessary to take into account the peculiarities of the industry. Dishonest brokers – it’s not a stamp from the movies; this is the reality of the sphere of binary options trading. Procrastination or problems with withdrawal, falsification of the entry price, etc. – it is a “spikes into the wheels” of the trader that actively use some unfair brokers.
- Gaps in the regulation of the binary options market. It is worth to note that in European countries and the CIS countries (particularly in Russia) made some steps to a more rigorous supervision of the brokers’ activities. Information about this area is extremely controversial. So, at this site we give to our visitors the most reliable information and try to be useful to them.