The make or break nature of the stock market is something that every investor is aware of. However, the binary options market is a relatively new and lucrative form of trading suitable to almost everyone from beginners to experienced traders irrespective of their professional background.
Binary options are also known as digital options or fixed return options since the amount of returns or losses are predetermined at the onset of the contract. Just like other forms of investment, binary options have their risks as well. However, the main advantage is that you know exactly how much you can win or lose, which makes it one of the safest ways to trade. While this type of trading is suitable for novice investors, experienced traders can also use binary options as a hedging strategy.
How binary options work
Binary options trading is all about predicting the price of an underlying asset in the market. As an investor you predict how a stock, index, commodity or currency pair will perform over a specific period of time. You do not buy any asset but simply predict whether the price of an underlying asset will rise or fall. That’s how simple, quick, and profitable a trade can be.
There are only two possible outcomes, a correct forecast or not, which is why this type of trading is called a binary option. Your returns when you make a correct prediction can vary between 60 to 85 percent and much more, depending on the type of asset and option. A wrong prediction will result in the loss of your investment, which is why binary options are also known as ‘all or nothing’. Since there is no fixed price, you decide the amount you want to invest, which can be as little as $24 for a single option. However, the minimum amount varies amongst brokers.
The process of trading binary options is simple. Suppose you want to invest $100. Choose an asset, for example, gold. Decide if the price of gold will go up or down. If you feel the price is likely to rise you need to use the ‘Call’ option. If you predict any decline in price choose the ‘Put’ option. Select the time of expiry of the option, which could be anything from 60 seconds to an hour, day or week.
If your broker offers a payout of 81% on your investment, you make an $81 profit if you predict correctly or lose your investment of $100 for a wrong forecast. When you predict correctly your option is said to expire ‘in the money’ or else it expires ‘out of the money’. However, some brokers offer between 5 to 15 percent as rebate if your option expires out of the money to soften the blow.
Types of binary options
While there are hundreds of underlying assets to choose from, which includes forex, commodities such as gold, oil, silver, and gas, indexes, and major stocks like Google, there are a few other binary option variations apart from the traditional ‘all or nothing’ binary feature.
Call/High/Up/ or Long Options
This is one of the most popular forms of binary options where you buy a ‘Call’ option with the belief that there will be a significant rise in the underlying asset much beyond the strike price prior to the expiry of the option. If you predict the asset direction correctly and your trade finishes beyond the expiration line it will be a winning trade. If the price falls below the strike price your call option will expire out of the money.
Put/Down or Short Options
With binary options you can profit when the value of an underlying asset falls as well. When you believe an underlying asset will finish below the current level on expiry, you ought to purchase a ‘Put’ option. Most brokers offer contracts on an hourly and end of day basis although you will find 60 second trades available as well. If your trade expires below the strike price you win.
Touch and No Touch
Touch option contracts have become increasingly popular with binary traders. A number of brokers offer this type of contract where you predict whether the price of an underlying asset will ‘touch’ a specific level during the duration of the options contract. You can choose a higher or lower level than the current price of the asset. If the price reaches the level you will receive the agreed payout or else the contract will expire worthless. You could choose the ‘No Touch’ option if you feel the asset will fail to reach a given target price.
Double One Touch And Double No Touch
This type of binary options trading is similar to Touch and No Touch. However, it involves predicting whether the price of an underlying asset will fall between two set prices. Only a few brokers offer this type of trading.
There is much more to binary options. If you are new to trading, this could be the safest way to begin your investment career. Most importantly, opt for a broker with a good reputation which offers a wide range of assets, expiry times, and a reliable trading platform. A good broker will be able to guide you through the process.
In addition, it is important to continue researching and understanding how underlying assets trade. Market trends play a major role in influencing the price of an asset so make sure you are well informed about current trends. While binary options trading offers a quick way to earn profits, money management is the key to your success. Design a financial plan that will keep you aware of your financial position so that you don’t risk misusing your earnings.