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Binary options trading: 5 stages of development of a successful trader
Financial analysts have identified 5 steps that a binary options trading trader goes through in professional development. In this article, ForTrader.ru magazine will try to reveal an objective situation for you regarding your professional status.
Financial analysts have identified five steps that a trader engaged in trade takes in the professional development binary options. Of course, the steps are rather arbitrary and differ, by and large, only in the psychological component. Nevertheless, having correctly assessed his current level, the binary options trader will know what he needs to strive for for professional growth. In this article, ForTrader.org magazine will try to reveal an objective situation for you regarding your working status.
Stage 1 binary options trading – unconscious incompetence
The first step is the beginner level traders binary options. Its main characteristic is the unconscious incompetence of the trader. It is at the first stage that the trader begins to understand that trading binary options is a profitable business that brings a certain profit. Along with this, he has absolutely no idea how to achieve stable profitability, so he is working hard to acquire the necessary knowledge.
Stage 2 – conscious incompetence
The second stage is already characterized by conscious incompetence. A trader reaches this level after he has been trading in the financial markets for some time, and he has an understanding that his level of knowledge is insufficient. At this level, the trader begins an active search for information to achieve a positive trading result. As a rule, most of the information is outdated or simply unnecessary.
Stage 3 – the binary options trader’s insight
It is at this level that the binary options trader receives insight, which is also insight. He begins to realize that, in fact, the process of trading binary options is not as complicated as it seemed to him at first. Simply put, the trader’s eyes open and he “ceases to produce entities beyond what is necessary.” At this stage, the trader, as a rule, already builds his own binary options trading strategy, his transactions gradually become profitable.
Stage 4 – conscious competence
The fourth stage is characterized by conscious competence and is more serious professionally than the previous one. At this level, ForTrader.org recalls, a binary options trader only makes informed transactions. He is able to conduct a clear analysis of all the consequences that open to him transactions with binary options.
5th stage – unconscious competence
And finally, the stage, which is characterized by unconscious competence. Binary options trading at this level occurs, figuratively speaking, “on the machine”. Analysis of the current situation takes a few seconds. Decisions to enter into a binary options transaction are made almost intuitively, based on accumulated experience and past transactions. A trader who has reached this level is characterized by absolute calm and complete confidence in their actions. The memory of his first inexperienced steps in binary options trading makes him condescending smile. His transactions bring tangible profits, which is a clear confirmation of his rightness in his choice and confidence in trading activities.
As you can see for yourself, the path of a binary options trader is not easy, however, like the path of any trader, it’s very interesting. Having made your efforts and reaching the fifth, highest step, you will remember with a smile (and with a profit in your pocket) your fear of trading binary options.
Binary Options Guide: The Truth About Binary Options
Trading binary options can seem deceptively simple, but leaning too far into that notion can blind people to some of the risks that often accompany this type of trading.
Before I go any further, I want to make it clear I’m not a binary options trader. I trade penny stocks and teach day trading. I’d love to see you join the Trading Challenge — it’s the result of over two decades of trading and a decade of teaching. It’s awesome.
If you’re interested in taking the binary options path, it’s critically important to understand exactly what you’re getting into and set appropriate expectations. And you should get a mentor who trades binary options. Seriously. Preparation is key.
Again, I don’t trade binaries. For the most part I think they’re scams. Can you trade them successfully? There are successful traders in every niche. But most traders lose. That’s the reality of the industry.
It doesn’t matter if you’re trading forex, penny stocks, options, big caps, or … binary options. Most traders lose and most trading teachers don’t want you to know about it. So I’m going to tell you about binary options in this post. But I don’t trade them and I don’t recommend it.
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Will trading binary options enable you to buy a villa in the South of France next year? Probably not. Will they allow you to quit your full-time job and finally start on that novel you’ve always wanted to write? Don’t count on it.
Here, we’ll take a look at what binary options trading is all about and you can decide whether it’s right for you. As you read, keep in mind that binary options are getting outlawed in more and more countries. Companies are getting shut down. Or they’re based overseas in places where you can’t sue them. More on that later.
Table of Contents
What Are Binary Options?
Before we dive into specific binary options trading strategies, let’s review exactly what binary options are. According to Investopedia’s definition:
A binary option, or asset-or-nothing option, is a type of option in which the payoff is structured to be either a fixed amount of compensation if the option expires in the money, or nothing at all if the option expires out of the money. The success of a binary option is thus based on a yes or no proposition, hence “binary”. A binary option automatically exercises, meaning the option holder does not have the choice to buy or sell the underlying asset.
At the core, binary options are based on a yes or no proposition. You must decide whether you believe an underlying asset will be above or below a specific price at a specific time.
Binary trades are ruled by expiry times. These time constraints indicate how long you have to make your predictions regarding whether you believe an underlying asset will be above or below a specific price at a specific time. Once the expiration limit occurs, your predictions determine whether you gained or lost money.
Expiration times vary from binary option to binary option. Some of these minimums are known as short expires, which means the expiration date is actually within mere minutes of the buy-in.
There are medium and long expiries, as well. For medium expiries, the deadline could be anywhere from two to five hours. Long expiries typically last between two and 24 hours. Many experts believe that longer expiration times can help make predictions easier.
What Are the Underlying Assets of Binary Options?
In order to participate in binary options trading, you must first have ownership of an asset that can be optioned for a fixed amount. The types of assets common in binary options include stocks, indices, commodities, and currencies. Many binary traders chooses to trade with stocks, as this option can allow them to get high returns within a short span of time.
Along with indices and commodities, currencies are another popular binary option vehicle. Since currencies are liquid and often subject to dynamic price fluctuation, many traders choose to analyze their binary options across the complex — and often shifting — global currency market.
A quick aside since we’re talking about forex. Be aware that the forex market is among the most difficult to trade. Why?
Because it’s the biggest and most liquid market in the world. You’re up against the smartest, richest, and often most experienced traders in the world. Personally, I don’t want to compete against that. Plus, the forex markets move so fast on news you don’t have access to, that there’s no edge whatsoever.
And now, a new asset has emerged: cryptocurrency. I don’t trade crypto, either. I’ve traded the random crypto-based stock. But this is a whole niche unto itself and I’m happy with penny stocks. Crypto has its own version of binary options — which is why I’ve included it here.
Led by Bitcoin, this new, digital currency class is intriguing investors around the world who see the digitization of finances as the way of the future.
According to Options Advice, there are two prominent ways you can capitalize on Bitcoin binary options. The first strategy is by trading on what you think the imminent fluctuation of Bitcoin might be, and the second is trading regular options with Bitcoins as your currency.
If you’re interested in taking the cryptocurrency binary options route, I strongly suggest familiarizing yourself as much as possible with the trends dictating the ebbs and flows of the altcoin market.
An entire niche financial industry has been built up around educating consumers and future investors of digital coins and tokens. From resources like Cryptoslate to ICO listing sites like Coinschedule, there are many resources available to help you make the most strategic crypto trading moves possible.
There are also a lot of scams. And strange happenings. Like when a crypto exchange CEO died with the ONLY key to $137 million in crypto. Ouch. More than 100,000 cryptocurrency holders learned a very hard lesson. Back to binary options …
What is a Call and What is a Put?
Two of the most common terms you’ll hear throughout the binary options world are call and put. These two labels represent the market positions of binary options.
You typically choose to call if it looks like the value will rise within the confines of the expiry time.
Options also have a strike price, which is the price at which the security would be bought or sold.
If you choose to call, you’re signifying your confidence that a stock will rise within the time limitations. If the stock valuation moves upward at all, you’ll receive both your initial investment as well as the return.
On the opposite end of the spectrum, a put signifies your confidence that the valuation of a stock will drop within a certain time limitation. So if you predict that a stock valuation will decline before the expiration date, and the stock does dwindle, you will have succeeded at that trade and will receive your initial investment — as well as the trade — back.
What Are Other Types of Binary Options?
Beyond call and put options, there are other distinguishing factors that separate binary options from one another.
This guide from Binary Tribune delves more specifically into binary options types based on the number of interactions a trader must initiate with the trade. The levels include one-touch, no-touch, double one-touch, double no-touch, and paired options.
Let’s take a look one-touch and no-touch options …
Essentially, a one-touch binary option indicates that in order for you to receive a payout, a trigger (or predefined barrier) must be reached. Traders often choose one-touch if they feel confident that a stock will move in a certain direction at a minimum amount.
The option only has to meet the predefined trigger level once (hence the “one-touch” term). However, as indicated by Binary Tribune, this strategy is often accompanied by some risk.
Beyond simply calling or putting, you also must feel confident that a certain valuation threshold will be crossed. However, with greater risk often comes greater reward.
In contrast, a no-touch binary option essentially depends on a trigger level not being reached.
Rather than hedging your bets that the valuation of a stock will rise above or dip below a specified amount, you’re betting that the trade will not dip above or below an amount.
Because you’re making the trade with the intention that a threshold will not be crossed in either direction, it’s referred to as “no-touch.” Like their one-touch counterparts, these trades come with greater reward — and risk — potential.
I liken one-touch and no-touch calls and puts to something like an electronic stop-loss. The problem is, you don’t have control. You’d better be damned sure you’re right. Which is impossible.
What Are the Pros and Cons of Binary Options?
Now that you understand binary options basics and the different factors between them, you might be wondering whether this type of trading aligns with your goals. Let’s weigh the pros and cons.
We’ll start with the benefits …
Low Barrier to Entry. You don’t need a masters in economics to engage in this kind of trading. For this reason, many first-timers enter the trading arena through buying and selling binary options. Comparatively, binary trading is relatively simple. When compared directly to other types of trading, including quantitative or arbitrage, trading binary options is straightforward.
Fast Returns. Many traders are eager to see fast results and liquidate within a specific time frame. Those who play the long game (investors) are typically most concerned with growing their money steadily over long periods of time. Many opt to invest in index funds, IRAs, or bonds. Trading binary options is fast paced.
Thing is … you can get all the speed you need trading penny stocks. So, while binary options might be a fast game, the reward might not be worth the risk.
High Rewards. Binary options trading is touted by those who promote it as high reward. It’s possible to receive up to a 70% return on their investments if your binary trades reach your expiration dates in the money. This high average return is what makes this type of trading vehicle attractive to many novice and expert traders.
As explained by Investopedia, the risk on binary options is capped off, so while the rewards could yield high returns, you can’t lose more than the cost of a trade.
Low Cost. If you’re just getting started with trading, there’s a good chance you don’t have excess capital lying around to snatch up shares of the fastest-rising stocks on the market. Binary trades offer an alternative to other types of investments that require high-capital buy-ins.
In theory, you can experiment with a binary trade for any amount you’d like, whether it’s $5 or $50. Starting small and working your way up to bigger trade amounts incrementally is a great way to learn the lay of the land.
As you familiarize yourself with expirations, strike prices and — if you’re interested in one- and no-touch options — triggers, it’s best to gamble with an expendable amount that won’t derail your entire financial status. Notice I used the word gamble — just sayin’.
Accessibility. Binary trading platforms make it easy to trade on any day and at any time. When it comes to binary options, traders aren’t necessarily beholden to standard market times and broker availability.
Now, let’s explore some of the disadvantages of binary trading …
Scams. Conduct any Google search on binary trades and one of the first things you’ll likely notice are the abundance of hits warning against binary scams and shady binary brokers.
Remember when I said I’d get back to the part about shady companies? Here goes …
… and I say this to protect and warn you.
Like I said, these companies are often based overseas. Places like Cyprus. (I have nothing against Cyprus. It’s a beautiful country with amazing people.) Anyway, these companies are based in places where you can’t sue them if they screw you.
Then you sign away pretty much your entire life in the forms they make you fill out. Your odds of winning are so low the brokers who do it are pretty much laughing at you. They’re laughing that so many people fall for this crap. It’s like going to the casino.
So, if you come across a binary broker that sounds too good to be true, it’s because he or she most likely is. And if you come across a binary broker who doesn’t let you liquidate your investment, run in the other direction.
Short term. Binary trades have expiration dates that are often fairly short windows of time. Given this, it’s impossible to use binary options as mechanisms for long-term investments. Which, of course, I don’t mind because I day-trade and teach day-trading. But if you’re looking for buy-and-hold investing, binary options aren’t the right solution.
Can You Really Make Money with Binary Options?
Short answer: It’s possible, but you MUST know what you’re doing. Like I keep saying. Most traders lose. Doesn’t matter the niche. I would never trade binary options. Ever. Your choice, I’m just tryin’ to keep it real.
If you’re serious about binary trading, start small. By making small trades and working your way up, you give yourself breathing room to assess market trends and develop the necessary skills.
As is the case with many types of trading, history is sometimes the best predictor of the future. Many successful binary options traders experience trading wins and financial growth because they’ve spent time studying and familiarizing themselves with market movements.
Wait. Does this sound familiar? Yep. You guessed it: you can’t cheat your way to success. Doesn’t matter the niche. I don’t trade binary options. I don’t recommend you trade them. But if you decide it’s for you then prepare yourself. Study your ass off.
Learning common candlestick patterns can make it easy to spot recurring trading patterns. If you want to understand candlestick patterns — and you do if you are serious about trading — I recommend you get a copy of the classic “Japanese Candlestick Charting Techniques” by Steve Nison. Doesn’t matter which niche you trade, this book should be on your bookshelf.
Of course, trading patterns are never 100 percent accurate, so don’t fool yourself into thinking of them as absolute stock predictions. However, the more you can learn about patterns and begin to recognize them yourself, the more likely you’ll be comfortable making your own options decisions.
Is it Safe and/or Legal to Trade Binary Options?
Naturally, binary options contain risk. And by now you know my take. I pretty much think they’re scams. But there are differing opinions and some even consider them safe trading routes. I’m not gonna tell you not to trade them. I recommend you don’t. I’ll be interested to hear back from you. When you’re ready to trade the way I teach … apply for the Trading Challenge.
While it’s legal to trade binary options within the United States, they’re only available to trade on Commodity Futures Trading Commission (CFTC) regulated exchanges within the country.
Binary options traded outside the U.S. are structured differently to those traded here. You can learn more in this article on Investopedia: What You Need To Know About Binary Options Outside the U.S.
The Bottom Line
The good: Some traders like binary options because they are traded at fixed costs. You know where you stand.
The bad: Binary investments are too much like flipping a coin, there are too many scams, and your odds of winning are so low you might as well go to the casino.
The bottom line: Educate yourself like crazy. Avoid sketchy brokers. Start small and work your way up. Remain vigilant. Stick with these rules, and someday you might reach your trading goals. Will you do it with binary options? I doubt it. But you might prove me wrong.
Want to Try Binary Options Trading?
At this point, I hope I’ve shed enough light on binary options trading that you don’t do it. But … you might be thinking about giving binary options trading a shot. If you do, study your butt off. Get a mentor. Don’t screw around. The best of the best in every niche work with a mentor.
Trading — any type of trading — can quickly become complicated. Like any other sector of trading, it’s important to seek out an education before you attempt to invest in this way. I can’t help you trade binary options. But I can help you learn to trade penny stocks …
Is the Trading Challenge for You?
As a teacher I want to help my students forge long-term, sustainable careers as traders. The Trading Challenge can help you reach your goals through risk-averse, conservative trading.
Plus, my best students — those who have become millionaires themselves — join me in coaching you.
What do you get?
- Wednesday morning live trading webinar. I show you live trades so you can see how it’s done. And it’s not only wins. These are true live trades. Sometimes I lose. But you’ll see how fast I cut losses and why I get out so fast when things turn against me.
- Wednesday evening live lesson and Q&A. No matter where I am in the world. This is killer stuff.
- Thursday live trading & review with Mark Croock. @thehonestcroock is at it every Thursday. You don’t want to miss this. Mark is one of my best students/teachers. He’s constantly in the challenge chat room alerting students.
- Annual Penny Stocking Silver Membership. You need this. Thousands of hours of video lessons and archived webinars. Immerse yourself. This is how to get good fast.
- PLUS: Two monthly bonus webinars by my top student Tim Grittani. It won’t take long to understand how Tim went from $1,500 to where he is now when you see how meticulous he is about his trades. Learn from a master.
WAIT! There’s more …
I always wanted to write that. Anyway, there is more, but you have to apply for the Trading Challenge to get it. Simple.
Will you be my next success story?
As you’ve now learned, if you study hard, start small, keep your scam radar on high alert, and stay educated, then becoming a successful trader is possible. But it’s not easy. So don’t even think about doing it if you’re not willing to work hard.
As for binary options …
Look, whatever you decide, it’s about how much time and effort you put into learning. I don’t think binary options are a good way to go. Plain and simple. But there are success stories.
If you’d rather learn what I teach, then apply for the Trading Challenge. But no lazy losers allowed. Seriously. Only join the Trading Challenge if you’re willing to work hard.
Are you a trader? Do you trade binary options? Comment below and let your fellow traders know how it works for you. Even if you are brand new, I love to hear from readers. Comment below!
Top Five Successful Strategies For Trading Binary Options
If you are trading without a strategy or a tactic to help you with binary options, you might as well
The article was written by Connor Harrison from Binary Brokers (BBZ). BBZ makes an effort to educate their traders so that they can understand recommendations regarding binary options, international legislation, risk management and other issues related to trading.
Trading in binary options is one of the popular trends in the financial markets today. Both experienced and novice traders are rushing to include them in their investment portfolios. Just like any other trading platform or business, you must have a strategy to use in order to consistently be making money.
If without a strategy or a tactic to help you trade in binary options, you might as well consider yourself gambling. Relying on luck is not very safe in trading binary options as it will eventually not work for you and might end up losing all of your investment. You will need a solid technique that you can use every time, which will help you make the right predictions. Moreover, you need to employ a strategy that you understand well and which consistently increases your chances of winning.
Bet or Trade?
Strategies are generally categorized into two groups. These categories are;
- Betting model based strategies – In these strategies, it is assumed that the investor will employ betting strategies, whether they are familiar with financial markets or not. These strategies use several tactics that are designed to increase the probability of winning. Strategies based on the news are the best example in this category.
- Market behavior strategies – In these strategies, the investor relies almost wholly on technical and statistical data that are readily available or that which they have researched and worked on. While these strategies are a bit harder to understand and master, they are the most reliable ones since they are objective. There are techniques developed to help you understand some of the data, such as charts and which will make it easier for a new trader.
The popular strategies to go for are:
I – Fundamental Analysis Strategy
This strategy is concerned with the analysis of the behavior of the overall performance or attributes of a company. As an investor or trader in binary options, you are interested in knowing about the health of the balance sheet, income statement and the cashflow statement of the company before you consider buying an option. The other factors that you should check out include the employee and the business partners’ satisfaction. In short, this strategy tries to look at the overall picture of the business they want to invest in their stock and at times the overall industry.
II – Technical Analysis Strategy
This is a quite popular strategy in options trading. It is mainly concerned with the study of the past, using different parameters such as charts in order to predict the future price of an asset. This method is not concerned with getting the intrinsic value of an asset. It’s quite useful in options trading because as a trader, you don’t have to delve into the company’s financial statements. Among the tools used in technical analysis include Bollinger bands and Moving Average among others.
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III – Basic Options Strategy
This strategy is quite popular among options traders. It is designed and employed by a trader to safeguard him/herself from incurring total losses on their investments. You will pick an underlying asset or currency that you are interested in and then if the market movement of the strike price is heading towards a good direction, say upwards, you place a call option. At the same time, you will place a put option on the same asset.
Let’s use an example:
The GBP/USD currency option is going at 1:4000. You place the call option of $100 which will expire in 30 minutes. The payout is 70% and 15% if you lose. In the first 15 minutes the asset is at 1:4015 which is good so far. At this specific time, you buy a put option for the same asset at 1:4015 expiring in 15 minutes at $100. The payouts are the same as those of the call option.
At the end of the 30 minutes there will be two outcomes;
- Your 30 minutes call option wins and the 15 minutes put option losses. You will have earned $185 from the 70% call winnings and the 15% consolation refund from the put option (the opposite can happen, put option wins and call option losses).
- Both the call and the put options end up in the money. You will get $340 ($170+$170). Since it’s almost impossible to lose on both options, the general risk of loss in this strategy is only $15 in order to win $140.
IV – Algorithmic and signals
There are apps which are sold and which are very good at trading or analyzing the market data. You might find it appropriate to invest in such an app. This app is installed in your computer and gathers data that you want and then analyzes it to come up with the best possible outcomes. Technical and fundamental analysis data are used here.
The computer will then pick a trade for you to trade in. You could even go ahead and design the app to be actually trading for you. You will however need to be regularly updating the raw data that the app picks its analyzing details from.
V – Co-integration Trading Strategy
There could be two stocks in the market that have a high correlation relationship. This could be because they are in the same industry and are traded in the same market, hence affected by many factors the same way. Given the high correlation between such a pair of stocks, you will find that whenever there is a gap between them it will close soon after. The gap can be caused by the weakening of one stock temporarily. The main task here is to identify the gap.
After identifying the gap, you should buy the call option for the stock that is weak or a put option for the asset if the stock higher in price is bound to come down. Eventually, the two assets will come to the correlation path and that should be the ‘point of exit’.
Strategies, just like investment options, are many and you could end up with one which gives you consistent winnings. If you are a new trader, research well and identify the one strategy that best suits your trading portfolio and pattern. If you are a bit more experienced, you can create your own strategy or combine two existing ones to form a hybrid.
What You Need To Know About Binary Options Outside the U.S
What Do You Need To Know About Binary Options Outside the U.S?
Binary options let traders profit from price fluctuations in multiple global markets, but it’s important to understand the risks and rewards of these controversial and often-misunderstood financial instruments. Binary options bear little resemblance to traditional options, featuring different payouts, fees, and risks, as well as a unique liquidity structure and investment process.
Binary options traded outside the U.S. are also structured differently than those available on U.S. exchanges. They offer a viable alternative when speculating or hedging but only if the trader fully understands the two potential and opposing outcomes.
The Financial Industry Regulatory Authority (FINRA) summed up regulator skepticism about these exotic instruments, advising investors “to be particularly wary of non-U.S. companies that offer binary options trading platforms. These include trading applications with names that often imply an easy path to riches.”
- Binary options have a clear expiration date, time, and strike price.
- Traders profit from price fluctuations in multiple global markets using binary options, though those traded outside the U.S. are structured differently than those available on U.S. exchanges.
- Non-U.S. binary options typically have a fixed payout and risk, and are offered by individual brokers rather than directly on an exchange.
- While typical high-low binary options are the most common type of binary option, international brokers typically offer several other types of binaries as well.
Binary options outside the U.S. are an alternative for speculating or hedging but come with advantages and disadvantages. The positives include a known risk and reward, no commissions, innumerable strike prices, and expiry dates. Negatives include non-ownership of the traded asset, little regulatory oversight, and a winning payout that is usually less than the loss on losing trades.
Understanding Binary Options Outside the U.S
What Are Binary Options?
Binary options are deceptively simple to understand, making them a popular choice for low-skilled traders. The most commonly traded instrument is a high-low or fixed-return option that provides access to stocks, indices, commodities, and foreign exchange.
These options have a clearly stated expiration date, time, and strike price. If a trader wagers correctly on the market’s direction and price at the time of expiration, they are paid a fixed return regardless of how much the instrument has moved since the transaction, while an incorrect wager loses the original investment.
The binary options trader buys a call when bullish on a stock, index, commodity, or currency pair, or a put on those instruments when bearish. For a call to make money, the market must trade above the strike price at the expiration time. For a put to make money, the market must trade below the strike price at the expiration time.
The broker discloses the strike price, expiration date, payout, and risk when the trade is first established. For most high-low binary options traded outside the U.S., the strike price is the current price or rate of the underlying financial product. Therefore, the trader is wagering whether the price on the expiration date will be higher or lower than the current price.
Binary Options Outside the US
Foreign Versus U.S. Binary Options
Non-U.S. binary options typically have a fixed payout and risk and are offered by individual brokers rather than directly on an exchange. These brokers profit from the difference between what they pay out on winning trades and what they collect on losing trades. While there are exceptions, these instruments are supposed to be held until expiration in an “all-or-nothing” payout structure.
Foreign brokers are not legally allowed to solicit U.S. residents unless registered with a U.S. regulatory body such as the Securities and Exchange Commission (SEC) or Commodities Futures Trading Commission (CFTC).
The Chicago Board Options Exchange (CBOE) began listing binary options for U.S. residents in 2008. The SEC regulates the CBOE, which offers investors increased protection compared to over-the-counter markets. Chicago-based Nadex also runs a binary options exchange for U.S. residents, subject to oversight by the CFTC.
These options can be traded at any time, with the rate fluctuating between one and 100, based on the current probability of the position finishing in or out of the money. There is full transparency at all times and the trader can take the profit or loss they see on their screen prior to expiration.
They can also enter as the rate fluctuates, taking advantage of varying risk-to-reward scenarios, or hold until expiration and close the position with the maximum gain or loss documented at the time of entry. Each trade requires a willing buyer and seller because U.S. binary options trade through an exchange, which makes money through a fee that matches counter-parties.
High-Low Binary Option Example
Your analysis indicates the Standard & Poor’s 500 index will rally for the rest of the trading day and you to buy an index call option. It’s currently trading at 1,800 so you’re wagering the index’s price at expiration will be above that number. Since binary options are available for many time frames—from minutes to months away—you choose an expiration time or date that supports your analysis.
You choose an option that expires in 30 minutes, paying out 70% plus your original stake if the S&P 500 is above 1,800 at that time or you lose the entire stake if the S&P 500 is below 1,800. Minimum and maximum investments vary from broker to broker.
Say you invest $100 in the call that expires in 30 minutes. The S&P 500 price at expiration determines whether you make or lose money. The price at expiration may be the last quoted price, or the (bid + ask)/2. Each binary options broker outlines their own expiration price rules.
In this case, assume the last quote on the S&P 500 before expiration was 1,802. Therefore, you make a $70 profit (or 70% of $100) and maintain your original $100 investment. If the price finished below 1,800, you would lose your original $100 investment.
If the price expires exactly on the strike price, it is common for the trader to receive her/his money back with no profit or loss, although brokers may have different rules. The profit and/or original investment is automatically added to the trader’s account when the position is closed.
Other Types of Binary Options
The example above is for a typical high-low binary option—the most common type of binary option—outside the U.S. International brokers will typically offer several other types of binaries as well.
These include “one-touch” options, where the traded instrument needs to touch the strike price just once before expiration to make money. There is a target above and below the current price, so traders can pick which target they believe will be hit before the expiration date/time.
Meanwhile, a “range” binary option allows traders to select a price range the asset will trade within until expiration. A payout is received if price stays within the range, while the investment is lost if it exits the range.
As competition in the binary options space heats up, brokers are offering additional products that boast 50% to 500% payouts. While product structures and requirements may change, the risk and reward is always known at the trade’s outset, allowing the trader to potentially make more on a position than they lose. Of course, an option offering a 500% payout will be structured in such a way that the probability of winning the payout is very low.
Unlike their U.S. counterparts, some foreign brokers allow traders to exit positions before expiration, but most do not. Exiting a trade before expiration typically results in a lower payout (specified by broker) or small loss, but the trader won’t lose their entire investment.
The Upside and Downside
Risk and reward are known in advance, offering a major advantage. There are only two outcomes: win a fixed amount or lose a fixed amount, and there are generally no commissions or fees. They’re simple to use and there’s only one decision to make: Is the underlying asset going up or down?
In addition, there are also no liquidity concerns because the trader doesn’t own the underlying asset and brokers can offer innumerable strike prices and expiration times/dates, which is an attractive feature. The trader can also access multiple asset classes anytime a market is open somewhere in the world.
On the downside, the reward is always less than the risk when playing high-low binary options. As a result, the trader must be right a high percentage of the time to cover inevitable losses.
While payout and risk fluctuate from broker to broker and instrument to instrument, one thing remains constant: losing trades cost the trader more than they can make on winning trades. Other types of binary options may provide payouts where the reward is potentially greater than the risk but the percentage of winning trades will be lower.
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