Binary options trading is a great way to speculate on markets without taking on a lot of risk. Here is a guide to binary options that contains lots of information.
Over the last decade, online binary options trading has grown in popularity. Both professional investors and individuals who want more investment options are trading binary options. People want more ways to invest, and binary options are an attractive way to gain exposure to equities, commodities, and other markets like FOREX.
When binary options are traded, there are only two possible outcomes. This is why they are called 'binary'. In a sense, a binary option is like a wager, as it will either be true or not. The 'bets' are on events in the financial markets, and if a trader is correct, they will gain from the binary option.
Markets need to have ways to self-regulate, and binary options trading allows market participants to speculate on assets that may be over, or undervalued. If the speculators are correct, they will earn a cash payment.
The basic structure of a binary option is simple. An investor will take a position that an asset will either rise or fall to a given price by a certain date. The risk of the trade is the money that is spent to buy the option, and it can never grow from the initial purchase price.
Trading in many kinds of derivatives is risky. Unlike CFDs or regular options, binary options are an easy way for new traders to get into derivatives, and not be exposed to large risks. If you want to learn more about how binary options work, it is a good idea to take time to do some research.
While binary options do limit your risk, you should understand how they work before you start spending your money with a broker.
The process of trading binary options is simple, even if you have never done it before. It can be done from anywhere with an internet connection, and many brokers offer mobile apps for smartphones.
All you have to do is find a binary options broker you trust and then open and fund an account. Once that is in place, you will be able to start buying binary options. Most brokers offer trading on a 24/5 basis, although some allow nonstop trading on a 24/7 basis.
There are both long and short term options, and both have advantages.
Binary options introduce the time factor to investments. When a person buys a stock, there is no hurry for it to appreciate in value. If a person bought the shares on a cash basis, they could wait a year or more for them to rise in value, and still, make a return.
While binary options are a little bit more complicated, but they have the ability to create much larger returns. A binary option can return far in excess of 50% on the original investment, and over a short period of time.
A knowledgeable trader can make almost double their money in less than a few minutes with binary options, which is very difficult to do with the regular share market. Binary options are a derivative, which means that the trader does not own the asset that is used to determine the price of the option.
The value of the options may rise or fall based on the performance of the asset that is used to set the option's price. In many cases, the broker will allow traders to trade at any time, so the price movements may not play a huge role in the options price until it expires.
For example, if the binary option is on the price of Brent Crude, the trader would gain or lose money based on if they were correct in determining the direction, the timeframe, and the magnitude of the Brent Crude's price moments.
Working with the right broker is vital to your success in the binary options trading business. You will need to understand the trading platforms that a broker offers, and how to best use them when trading binary options.
It is important to do research on any potential broker, and ensure that you will get the tools you need to trade successfully. Make sure that the trading platform that the broker offers is responsive, and gives you the ability to trade from both desktop and mobile platforms.
The financial markets move quickly. It is difficult to keep on top all the opportunities that happen on a daily basis, and a signal service can help you to cash in on market movements that you may overlook otherwise.
A signal service watches the entire financial market 24/7, and when it sees an opportunity, it will send you a text message, email, or some other sort of alert. Instead of sitting in front of a computer all day, you can wait for a signal, and then take on a position in the binary options market.
Using signals makes a trader's life a lot easier, and it allows you to work from a proven trading methodology. A signal service will have a rating based on how often it is correct, which gives you a way to gauge how much money you will make with the platform.
While no algo is perfect, you will be able to trade with a higher degree of confidence when using a signal service that has a great track record.
Binary options are a financial instrument, like any other. In most cases, a binary option will be issued by your broker, so it is basically a question of counterparty risk. If you trust your broker, then there is no reason to doubt the quality of any instrument they handle, whether it be a CFD, binary option, or warrant.
Because binary options offer a very high rate of return, it is important to make sure the broker you choose to trust has a good track record of making their clients happy. When an investor can earn more than a 50% profit in a matter of minutes, it is necessary to know that the broker will actually allow its clients to withdraw their gains.
In terms of structure, binary options offer a much higher degree of safety than a normal option. Going short in the options market can be very risky, but binary options remove this risk. Investors how much they can potentially lose when binary options are bought, and there is no way to lose more than the purchase price.
Additionally, binary options give regular investors the ability to make outsized gains, which puts them in a position to develop another income stream.
The options market was the basis for binary options. An option gives a person the right, but not the obligation, to sell a given financial instrument at a given price, on or before a certain date. The options market is far more complex than the stock market, and it isn't easy to navigate without a lot of training and assistance.
When the Chicago Board of Trade introduced the Chicago Board Options Exchange (CBOE) in 1971, trading options became far more accessible. It is far easier to trade any instrument on an exchange, as pricing is transparent, and there is a central clearing authority.
The Options Clearing Corporation (OCC) was created to oversee options clearance operations for the CBOE, and also to make sure that large market-making entities were able to meet their obligations. Options trading grew steadily from these events, and binary options were created as a way to make the options market more accessible to retail investors.
Unlike regular options, binary options are far easier to price and trade. There is no way that binary options can 'blow up', and cost the trader far more money than they have in their account.
In 2007, the OCC removed any roadblocks to binary options being traded on major exchanges, and a year later, the US Securities and Exchange Commission (SEC) created regulations that legalized binary options as tradable contracts in offshore financial markets.
Later in 2008, the American Stock Exchange offered the first publicly traded binary options, and a little while after, the CBOE listed binary options as well. Binary options have become increasingly popular over the last decade. Today, there are advanced platforms for traders, and also numerous binary options brokers to choose from.
Online binary options brokers now offer contracts that cover a range of financial instruments, and also give their clients cutting edge trading tools to work with. In addition to great platforms, online traders have access to flexible contract terms that include – a range of contract types, various fulfillment times, and numerous strike prices.
With all the binary options that are on offer with online brokers, traders have the ability to use aggressive trading strategies that can create massive gains. In 2010 there were even more advancements made to the binary options industry, like a fixed rewards system, which gives traders a great way to model their potential gains.
The online trading market for binary options gained a stellar reputation globally, and it has evolved into a mature market in a little more than 10 years. There are many well-built trading platforms on the market today that are made specifically for binary options, and traders can work with reputable brokers from anywhere there is an internet connection.
Binary options have grown into a market that offers significant advantages to investors who want to control a large notional position, with very little capital. Because binary options give investors a known payout with a set level of risk, it is very easy to use them for both hedging and speculation.
Instead of using loads of capital to speculate on short and medium-term movements in the markets, binary options give investors the chance to make big profits from market movements and limit their losses if they end up picking the wrong direction.
Unlike many other forms of investment, binary options introduce time into the pricing equation. When time is included, it is much easier to take advantage of small moves, as the counterparty will have an incentive to give the buyer of the options a premium for their capital-at-risk.
With all these advantages, it isn't difficult to see why binary options have become so popular, and why binary options brokers have become a staple in the global financial services industry.
Despite the fact that binary options have gone mainstream, there are still many investors who are a little bit nervous about entering the sector. A big part of this is the general lack of trust in financial institutions that people have in the post-2008 world, as many big banks and brokers have been shown to be less than honest, especially with their retail customers.
While many investors remain cautious, there are many opportunities in the binary options market, and there are also numerous regulated binary options brokers. It is important to understand how the binary options market is regulated, and what kind of broker you can trust with your investment capital.
To be sure, there are many nations that allow the trade of binary options.
One of the most popular places for binary options brokers to be based in the Republic of Cypress. Many people don't understand the financial advantages that the Republic of Cypress offers businesses, and why financial service providers choose to work from of the Mediterranean nation.
In addition to a strict regulatory structure, Cypress levies corporate taxes at a much lower rate than the UK and USA. In the UK, a company may pay as much as 24% in taxes, and in the USA, that rate can be as high as 35%. In Cypress, corporations only pay 10% per year in taxes, which is why so many professional financial service providers choose to register in the Republic of Cypress.
Markets in Cypress are harmonized with wider MiFID EU regulations, although some brokers may refuse to open accounts for US citizens and residents. The USA pushes regulations on any entity that does business with US citizens and residents, and the costs associated with these regulations are substantial.
The EU's MiFID is a serious body of regulations to ensure that markets function well, and retail customers are protected. In addition to making markets safer for people in the EU, the body of regulations also created smooth integration for any nation in the EU. Cypress is 100% complaint with MiFID regulations via its Investment Services and Activities and Regulated Markets Law 144(I) of 2007.
In the wake of Brexit, and the lack of MiFID adoption by UK-based brokers, it is fair to say that Cypress-based binary options brokers at least as secure as Uk based brokers, and in fact, may be better regulated.
Additionally, the world of binary options is still new, and there has been a lack of direct regulations in many developed markets. Many markets that start as Over-The-Counter (OTC) markets are self-regulated, and binary options are no different. As the industry has grown, the need for direct regulations has also become more pressing.
Cypress was one of the first places to create a legal standard specifically for binary options, and there is now a legal mandate for the Cyprus Securities and Exchange Commission (CySEC) to regulate binary options directly.
In the UK it is a very different story, as binary options aren't considered to be financial instruments at all. Instead, they are regulated by the UK Gaming Commission, as UK law considers binary options to be 'bets', and not financial derivatives. As a result of this, the courts can't intervene on behalf of binary options investors, as the debts fall outside of the UK's enforcement mechanism.
Trading binary options will require you to learn some new ideas and industry terms. This short guide to binary options trading will introduce you to how binary options are traded and give you some idea of how the markets work.
You may want to bookmark this page, or just keep it open as you begin to research the binary options market. In time these ideas will become second nature to you as you practice trading binary options, and learn how to create your own successful trading strategies.
A binary option builds on the basic architecture of an option. Binary options introduce the idea of a fixed amount of risk, and also a set level of reward. Like any other derivative, binary options are an agreement between an option seller (broker or market maker) and a buyer (investor).
Binary options will have one result or the other. An investor will either gain the predetermined reward or lose the money they spent to buy the option. In the world of regular options, there is no guaranteed payout, and it is possible to lose far more than the purchase price of the option.
Other terms that are used in the binary options market are up or down options or touch no/touch options. All of these binary options can be used to speculate on the direction of financial assets, and gain an income if used wisely.
Using binary options is a basic process. As a trader, you will need to decide which direction a market is moving, and make trades based on your view. Most binary options brokers will offer you a range of products that cover stocks, commodities, and FOREX.
Once you have decided on which direction a market is going to trade, you will have to decide on the timeframe and the magnitude of the move. Binary options will expire at a certain time, and at a given price level.
As mentioned previously, the amount the binary option will pay is set at the time of purchase. In general, binary options will yield between 60% and 80%, although some offer higher returns. In the event that you are not correct, you will lose the purchase price of the options, but no more.
Binary options have three variables, and it is important to understand all three.
A binary option will have:
Let's have a look at what these terms mean in the context of a hypothetical binary options trade.
A trader thinks that the price of oil will rise over the next few days. At the moment, WTI crude is trading at $35 USD per barrel. There are binary options that will pay a trader 65% if the price of WTI rises to $45 within two days.
In this example-
$45 USD is the Strike Price
60% is the Payout Percentage
Two days is Expiry Time
There are no set limits to expiry time or the price levels that binary options can cover. The broker will choose how to create the option's characteristics, and a trader will buy the options based on their view. The payout percentage will be added to the amount that a trader pays for the option, and the entire structure will be agreed to when the binary option is purchased by the trader.
In some cases, a broker will return a fixed amount of the option's purchase price to the trader if the trader is incorrect. Some broker do not offer this feature, and the amount that is returned will vary from broker to broker.
There are a range of binary option types, but the most basic kind is an up/down structure that allows traders to take a simple position on the direction of a financial asset. If the trader is correct, they will earn a return on their investment.
If you want to learn more about how to trade binary options, check out our wide-reaching guide to trading strategies.
There are many tools you can use to make your trading strategies more effective. We have a large database of binary option trading tools, so you don't waste time with inferior quality tools that may cost you time and money.
Let's dig into some of the most important ideas for any binary options trader to keep in mind. Some of these ideas could make a huge difference in your trading career, so pay attention.
Here are some important ideas:
Many binary options brokers allow you to open an account with $10 USD
Binary Options limit risk to the purchase price of the option
A trader can't lose more than they have staked on a trade
Binary options are derivatives, and they don't convey ownership of that asset which sets the option's price
Trading in binary options is risky, so don't invest more money than you can afford to do without
There are a wide range of binary option types – up/down binary options are the most common
If a trader wants to earn a constant income from binary options, most of the trades need to pay
Binary options are one of the easiest kinds of derivatives to trade
Regardless of the kind of binary option you choose to trade, all the specifications will be states before the contract is sold. You will know the cost of the option, its parameters, and how much you will gain if you are correct in your view of the market. Regardless of how confident you are in your view, there is never a good reason to risk more than you can afford to lose.
Trading up/down binary options is one of the simplest ways to trade derivatives. You will be able to select a call or put option on a given market, which means that you think the price will go up, or down, respectively.
Let's look at an example to show how easy these binary options are to trade.
Binary options brokers generally supply charts for the markets. We will suppose that you think that oil will rise in value, and you want to check the charts to see how oil has been trading. You should be able to check your brokers' site and see a chart for WTI crude oil.
We will suppose that the chart confirms your view that oil is going to rise, and you choose to look for options that will pay if the oil markets follow your view. Your broker will offer call options on the crude oil markets, and you should be able to click on the call option button to enter into a trade.
Once you find the strike price and duration that suits your view, you can enter an amount to stake, and buy the options. Then, you will have to wait, and see if you were correct. If you think that crude oil is set to drop in price, all you have to do is buy put options, instead of call options. The rest of the process is the same.
If you are correct, and the market does what you expect, the options will pay out the set amount that was disclosed when you bought them. There are only two ways the market can go, and if you are correct, you will make money. If you are incorrect, you will lose the money you paid for the options, but never more.
Binary options make derivatives trading easy. As there are only two potential outcomes, it is very easy for beginners to enter the derivatives market without taking on big risks.
If you are looking for a way to speculate on financial assets, and you don't want to take on risks that are difficult to understand, binary options might be a good choice. You will know exactly how much you can make from the trade, and also the amount of money you are risking.
The up/down architecture makes binary options even easier to trade. It doesn't matter if you want to trade gold, oil, equities or FOREX, the same rules apply, as up/down binary options work along the same lines regardless of the underlying asset. The broker's platform is also largely irrelevant, as the simplicity of the architecture removes any meaningful complications.
You will be able to speculate on whatever market you like, with whatever bias you choose. If you want to make aggressive speculations that will pay off big, you can. You can also choose to take on more conservative positions that are more likely to produce a constant yield.
Binary options have a range of expiry times. Your broker will likely offer options that have an expiry time of a few seconds, to as much as a month or more. The longer the time, the more expensive the option is likely to be. If you are looking for a way to hedge other positions, longer-term options may make sense.
At the time of the option's expiration, you will either be correct or not. The broker will compare the option's strike price to the price of the underlying instrument at the exchange, and if you were correct, you will be paid. If you bought call options, and the exchange price is above the strike price, you will gain money!