The Best Binary Options Broker 2020!
Perfect Choice For Beginners!
Free Demo Account!
Free Trading Education!
Get Your Sing-Up Bonus Now!
Only For Experienced Traders!
Glossary database does not contain any word or phrase that begins with the letter “GLOSSARY”.
This glossary contains definitions of the many terms, phrases and abbreviations used in the world of options trading and is a continual work in progress. To start using the glossary, click on the above alphabetical hyperlink corresponding to the first letter of the term you wish to understand.
You May Also Like
Buying Straddles into Earnings
Buying straddles is a great way to play earnings. Many a times, stock price gap up or down following the quarterly earnings report but often, the direction of the movement can be unpredictable. For instance, a sell off can occur even though the earnings report is good if investors had expected great results. [Read on. ]
Writing Puts to Purchase Stocks
If you are very bullish on a particular stock for the long term and is looking to purchase the stock but feels that it is slightly overvalued at the moment, then you may want to consider writing put options on the stock as a means to acquire it at a discount. [Read on. ]
What are Binary Options and How to Trade Them?
Also known as digital options, binary options belong to a special class of exotic options in which the option trader speculate purely on the direction of the underlying within a relatively short period of time. [Read on. ]
Investing in Growth Stocks using LEAPSÂ® options
If you are investing the Peter Lynch style, trying to predict the next multi-bagger, then you would want to find out more about LEAPSÂ® and why I consider them to be a great option for investing in the next MicrosoftÂ®. [Read on. ]
Effect of Dividends on Option Pricing
Cash dividends issued by stocks have big impact on their option prices. This is because the underlying stock price is expected to drop by the dividend amount on the ex-dividend date. [Read on. ]
Bull Call Spread: An Alternative to the Covered Call
As an alternative to writing covered calls, one can enter a bull call spread for a similar profit potential but with significantly less capital requirement. In place of holding the underlying stock in the covered call strategy, the alternative. [Read on. ]
Dividend Capture using Covered Calls
Some stocks pay generous dividends every quarter. You qualify for the dividend if you are holding on the shares before the ex-dividend date. [Read on. ]
Leverage using Calls, Not Margin Calls
To achieve higher returns in the stock market, besides doing more homework on the companies you wish to buy, it is often necessary to take on higher risk. A most common way to do that is to buy stocks on margin. [Read on. ]
Day Trading using Options
Day trading options can be a successful, profitable strategy but there are a couple of things you need to know before you use start using options for day trading. [Read on. ]
What is the Put Call Ratio and How to Use It
Learn about the put call ratio, the way it is derived and how it can be used as a contrarian indicator. [Read on. ]
The Best Binary Options Broker 2020!
Perfect Choice For Beginners!
Free Demo Account!
Free Trading Education!
Get Your Sing-Up Bonus Now!
Only For Experienced Traders!
Understanding Put-Call Parity
Put-call parity is an important principle in options pricing first identified by Hans Stoll in his paper, The Relation Between Put and Call Prices, in 1969. It states that the premium of a call option implies a certain fair price for the corresponding put option having the same strike price and expiration date, and vice versa. [Read on. ]
Understanding the Greeks
In options trading, you may notice the use of certain greek alphabets like delta or gamma when describing risks associated with various positions. They are known as “the greeks”. [Read on. ]
Valuing Common Stock using Discounted Cash Flow Analysis
Since the value of stock options depends on the price of the underlying stock, it is useful to calculate the fair value of the stock by using a technique known as discounted cash flow. [Read on. ]
Nadex Binary Option Basics in the U.S.
The most common definition found for an option is that it is an investment instrument (generally a contract) in which a trader purchases the option to buy or sell the underlying asset. In layman’s terms, the owner of a stock writes a buy (call) or sell (put) option on shares of that stock; an options trader purchases the ability, but not the obligation, to buy or sell the writer’s offered shares. The writer is obligated to conduct the transaction if the trader exercises the right they purchased.
These options are then traded between investors, varying in price with the asset they are based on. Nadex binary options, however, have fixed payouts—this means the investor will receive either all or none of the profit—and are popular because they are relatively easy to understand.
Binary options have complications when purchased outside of the U.S. There is not as much regulation, opening the doors for fraudulent activities. Authorities advise staying away from foreign binary options presented via websites. This means that if you want to trade binary options in the U.S., you’ll likely be trading “Nadex options.” Nadex is the primary binary options exchange in the U.S. Here’s a basic rundown of how these binary options work.
Binary Options in the U.S. (Nadex)
A Nadex binary option is a wager that the price of an asset will be above or below a specific price (called the strike price) at the time the option expires. For example, a trader would consider if the price of gold would be above a $1,550 strike price at 1:30 PM (the option expiration time). If the trader thought it would be, they would buy the option. If they thought it wouldn’t be above the strike price, they would try to sell any options they had.
Binary options are written for stock indexes, forex (currencies), commodities, news events, and bitcoin, with various strike prices and expiry dates or times. This makes them suitable for day traders and swing traders as they are geared towards the short-term.
The binary options are priced between $0 and $100. When the option expires, it’s worth either $0 or $100, depending on whether the underlying asset is above or below the strike price when the option expires. The price of the option is set by the buyers and sellers of the option contract and represents the approximate odds of the price reaching $0 or $100.
Binary options trading is much like visiting a casino, you are playing the odds.
For example, if the option is trading at $50, then traders view the odds of the option expiring at $0 or $100 as equal. If the option is trading at $20, traders view the odds of the option expiring at $0 as greater than expiring at $100.
You can buy, sell, close or hold an option at any time, at any price available, up until expiry. Should you choose to hold, the option will either be worth $0 (good if you sold options) or $100 (good if you bought options).
Maximum Profit and Loss
Profits and losses are created based on the difference between the expiry price, and the price at which you buy or sell the option.
If you buy an option—expecting the price of the underlying asset to be above the strike price at expiry—your maximum risk is your purchase price minus $0. For example, if you buy an option at $45, your maximum risk is $45 (you have risked the money you used to purchase the option). Your maximum profit is $100 minus your purchase price. In this case, your maximum profit is $55 (if the option maxes out).
|Purchase Price||Risk||Expiry Price||Max Profit||Loss|
|Sell Price||Risk||Expiry Price||Max Profit||Loss|
If you sell a Nadex binary option—expecting the price of the underlying asset to be below the strike price at expiry—your maximum risk is $100 minus your sale price. For example, if you sell an option at $35 your maximum risk is $65. Your maximum reward is your sale price minus $0; in this case $35.
Every dollar the option contract moves is worth $1 in profit or loss. You can buy or sell multiple options to increase or decrease your gain or loss. For example, if you buy three Nadex binary options at $40, your maximum risk is 3 X $40=$120 and your maximum gain is 3 X $60 = $180. Try to keep your risk on each trade to a small percentage of your account’s capital.
Each trader is responsible for providing the capital to fund their trade. If you buy an option at $50, your maximum risk is $50. You need to have at least $50 in your account to fund the trade. The seller of the option, also risking $50, must have at least $50 to fund the trade.
The minimum deposit required to open a Nadex account is $250 (for direct trade members), although no minimum trading balance is required once the account is open since you can only open positions if you have enough capital.
FCM and Market Maker members are required to maintain minimum balances starting at $100,000 but have no membership fees.
Trading fees are $1 per option to enter or exit, and a $1 settlement fee per option (if in the money) at expiry, depending on the order lot sizes. Lots of 1 to 50 are charged the fees, and lots of 51 or over are not.
There is no charge if you are out of the money (out of the money means the strike price is above the market value, in the money means the strike price is below the market price). Fees are charged to enter and exit positions. If you hold an option until expiry and lose, you are not charged the exit fee. Nadex offers a demo account where you can try binary options trading risk-free.
Thoughts to Takeaway
If you want to trade binary options in the U.S., Nadex is the main place to do it. Nadex options differ from binary options traded elsewhere in the world. The structure is transparent, and each option has a price, underlying asset, and an expiry. At expiry the option is worth $0 or $100, creating a profit or loss for the traders involved.
Holding the option until expiry isn’t required. Buy, sell or close your options positions at any time up until expiry. You can open a basic trading account for as little $250, and there are no trading minimums except that you must have the capital available to cover the maximum risk on each trade you take.
How to Succeed with Binary Options Trading 2020
Welcome to the largest expert guide to binary options and binary trading online. BinaryOptions.net has educated traders globally since 2020 and all our articles are written by professionals who make a living in the finance industry and online trading. We have close to a thousand articles and reviews to guide you to be a more profitable trader in 2020 no matter what your current experience level is. If you wish to discuss trading or brokers with other traders, we also have the world’s largest forum with over 20 000 members and lots of daily activity. Read on to get started trading today!
Top Brokers in Russia
What is a Binary Option and How Do You Make Money?
A binary option is a fast and extremely simple financial instrument which allows investors to speculate on whether the price of an asset will go up or down in the future, for example the stock price of Google, the price of Bitcoin, the USD/GBP exchange rate, or the price of gold. The time span can be as little as 60 seconds, making it possible to trade hundreds of times per day across any global market.
Before you place a trade you know exactly how much you stand to gain if your prediction is correct, usually 70-95% – if you invest $100 you will receive a credit of $170 – $195 on a successful trade. This makes risk management and trading decisions much more simple. The outcome is always a Yes or No answer – you either win it all or you lose it all – hence it being a “binary” option. The risk and reward is known in advance and this structured payoff is one of the attractions.
Exchange traded binaries are also now available, meaning traders are not trading against the broker.
To get started trading you first need a regulated broker account (or licensed). Pick one from the recommended brokers list, where only brokers that have shown themselves to be trustworthy are included. The top broker has been selected as the best choice for most traders.
If you are completely new to binary options you can open a demo account with most brokers, to try out their platform and see what it’s like to trade before you deposit real money.
Introduction Video – How to Trade Binary Options
These videos will introduce you to the concept of binary options and how trading works. If you want to know even more details, please read this whole page and follow the links to all the more in-depth articles. Binary trading does not have to be complicated, but as with any topic you can educate yourself to be an expert and perfect your skills.
The most common type of binary option is the simple “Up/Down” trade. There are however, different types of option. The one common factor, is that the outcome will have a “binary” result (Yes or No). Here are some of the types available:
- Up/Down or High/Low – The basic and most common binary option. Will a price finish higher or lower than the current price a the time of expiry.
- In/Out, Range or Boundary – This option sets a “high” figure and “low” figure. Traders predict whether the price will finish within, or outside, of these levels (or ‘boundaries’).
- Touch/No Touch – These have set levels, higher or lower than the current price. The trader has to predict whether the actual price will ‘touch’ those levels at any point between the time of the trade an expiry.
Note with a touch option, that the trade can close before the expiry time – if the price level is touched before the option expires, then the “Touch” option will payout immediately, regardless of whether the price moves away from the touch level afterwards.
- Ladder – These options behave like a normal Up/Down trade, but rather than using the current strike price, the ladder will have preset price levels (‘laddered’ progressively up or down).These can often be some way from the current strike price.As these options generally need a significant price move, payouts will often go beyond 100% – but both sides of the trade may not be available.
How to Trade – Step by Step Guide
Below is a step by step guide to placing a binary trade:
- Choose a broker – Use our broker reviews and comparison tools to find the best binary trading site for you.
- Select the asset or market to trade – Assets lists are huge, and cover Commodities, Stocks, Cryptocurrency, Forex or Indices. The price of oil, or the Apple stock price, for example.
- Select the expiry time – Options can expire anywhere between 30 seconds up to a year.
- Set the size of the trade – Remember 100% of the investment is at risk so consider the trade amount carefully.
- Click Call / Put or Buy / Sell – Will the asset value rise or fall? Some broker label buttons differently.
- Check and confirm the trade – Many brokers give traders a chance to ensure the details are correct before confirming the trade.
Choose a Broker
Options fraud has been a significant problem in the past. Fraudulent and unlicensed operators exploited binary options as a new exotic derivative. These firms are thankfully disappearing as regulators have finally begun to act, but traders still need to look for regulated brokers.
Note! Don’t EVER trade with a broker or use a service that’s on our blacklist and scams page, stick with the ones we recommend here on the site. Here are some shortcuts to pages that can help you determine which broker is right for you:
- Compare all brokers – if you want to compare the features and offers of all recommended brokers.
- Bonuses and Offers – if you want to make sure you get extra money to trade with, or other promotions and offers.
- Low minimum deposit brokers – if you want to trade for real without having to deposit large sums of money.
- Demo Accounts – if you want to try a trading platform “for real” without depositing money at all.
- Halal Brokers – if you are one of the growing number of Muslim traders.
The number and diversity of assets you can trade varies from broker to broker. Most brokers provide options on popular assets such as major forex pairs including the EUR/USD, USD/JPY and GBP/USD, as well as major stock indices such as the FTSE, S&P 500 or Dow Jones Industrial. Commodities including gold, silver, oil are also generally offered.
Individual stocks and equities are also tradable through many binary brokers. Not every stock will be available though, but generally you can choose from about 25 to 100 popular stocks, such as Google and Apple. These lists are growing all the time as demand dictates.
The asset lists are always listed clearly on every trading platform, and most brokers make their full asset lists available on their website. This information is also available within our reviews, including currency pairs.
The expiry time is the point at which a trade is closed and settled. The only exception is where a ‘Touch’ option has hit a preset level prior to expiry. The expiry for any given trade can range from 30 seconds, up to a year. While binaries initially started with very short expiries, demand has ensured there is now a broad range of expiry times available. Some brokers even give traders the flexibility to set their own specific expiry time.
Expiries are generally grouped into three categories:
- Short Term / Turbo – These are normally classed as any expiry under 5 minutes
- Normal – These would range from 5 minutes, up to ‘end of day’ expiries which expire when the local market for that asset closes.
- Long term – Any expiry beyond the end of the day would be considered long term. The longest expiry might be 12 months.
While slow to react to binary options initially, regulators around the world are now starting to regulate the industry and make their presence felt. The major regulators currently include:
- Financial Conduct Authority (FCA) – UK regulator
- Cyprus Securities and Exchange Commission (CySec) – Cyprus Regulator, often ‘passported’ throughout the EU, under MiFID
- Commodity Futures Trading Commission (CFTC) – US regulator
- Australian Securities and Investments Commission (ASIC)
There are also regulators operating in Malta and the Isle of Man. Many other authorities are now taking a keen a interest in binaries specifically, notably in Europe where domestic regulators are keen to bolster the CySec regulation.
Unregulated brokers still operate, and while some are trustworthy, a lack of regulation is a clear warning sign for potential new customers.
Recently, ESMA (European Securities and Markets Authority) moved to ban the sale and marketing of binary options in the EU. The ban however, only applies to brokers regulated in the EU. This leaves traders two choices to keep trading: Firstly, they can trade with an unregulated firm – this is extremely high risk and not advisable. Some unregulated firms are responsible and honest, but many are not.
The second choice is to use a firm regulated by bodies outside of the EU. ASIC in Australia are a strong regulator – but they will not be implementing a ban. This means ASIC regulated firms can still accept EU traders. See our broker lists for regulated or trusted brokers in your region.
There is also a third option. Traders who register as ‘professional’ are exempt from the new ban. The ban is only designed to protect ‘retail’ investors. A professional trader can continue trading at EU regulated brokers such as IQ Option. To be classed as professional, an account holder must meet two of these three criteria:
- Open 10 or more trades per quarter, of €150 or more.
- Have assets of €500,000 or more
- Have worked for two years in a financial firm and have experience of financial products.
Strategies and Guides
We have a lot of detailed guides and strategy articles for both general education and specialized trading techniques. Below are a few to get you started if you want to learn the basic before you start trading. From Martingale to Rainbow, you can find plenty more on the strategy page.
Signals and Other Services
For further reading on signals and reviews of different services go to the signals page.
If you are totally new to the trading scene then watch this great video by Professor Shiller of Yale University who introduces the main ideas of options:
Education for beginners:
Types of Trades
How to Set Up a Trade
The ability to trade the different types of binary options can be achieved by understanding certain concepts such as strike price or price barrier, settlement, and expiration date. All trades have dates at which they expire.
When the trade expires, the behaviour of the price action according to the type selected will determine if it’s in profit (in the money) or in a loss position (out-of-the-money). In addition, the price targets are key levels that the trader sets as benchmarks to determine outcomes. We will see the application of price targets when we explain the different types.
There are three types of trades. Each of these has different variations. These are:
Let us take them one after the other.
Also called the Up/Down binary trade, the essence is to predict if the market price of the asset will end up higher or lower than the strike price (the selected target price) before the expiration. If the trader expects the price to go up (the “Up” or “High” trade), he purchases a call option. If he expects the price to head downwards (“Low” or “Down”), he purchases a put option. Expiry times can be as low as 5 minutes.
Please note: some brokers classify Up/Down as a different types, where a trader purchases a call option if he expects the price to rise beyond the current price, or purchases a put option if he expects the price to fall below current prices. You may see this as a Rise/Fall type on some trading platforms.
The In/Out type, also called the “tunnel trade” or the “boundary trade”, is used to trade price consolidations (“in”) and breakouts (“out”). How does it work? First, the trader sets two price targets to form a price range. He then purchases an option to predict if the price will stay within the price range/tunnel until expiration (In) or if the price will breakout of the price range in either direction (Out).
The best way to use the tunnel binaries is to use the pivot points of the asset. If you are familiar with pivot points in forex, then you should be able to trade this type.
This type is predicated on the price action touching a price barrier or not. A “Touch” option is a type where the trader purchases a contract that will deliver profit if the market price of the asset purchased touches the set target price at least once before expiry. If the price action does not touch the price target (the strike price) before expiry, the trade will end up as a loss.
A “No Touch” is the exact opposite of the Touch. Here you are betting on the price action of the underlying asset not touching the strike price before the expiration.
There are variations of this type where we have the Double Touch and Double No Touch. Here the trader can set two price targets and purchase a contract that bets on the price touching both targets before expiration (Double Touch) or not touching both targets before expiration (Double No Touch). Normally you would only employ the Double Touch trade when there is intense market volatility and prices are expected to take out several price levels.
Some brokers offer all three types, while others offer two, and there are those that offer only one variety. In addition, some brokers also put restrictions on how expiration dates are set. In order to get the best of the different types, traders are advised to shop around for brokers who will give them maximum flexibility in terms of types and expiration times that can be set.
Trading via your mobile has been made very easy as all major brokers provide fully developed mobile trading apps. Most trading platforms have been designed with mobile device users in mind. So the mobile version will be very similar, if not the same, as the full web version on the traditional websites.
Brokers will cater for both iOS and Android devices, and produce versions for each. Downloads are quick, and traders can sign up via the mobile site as well. Our reviews contain more detail about each brokers mobile app, but most are fully aware that this is a growing area of trading. Traders want to react immediately to news events and market updates, so brokers provide the tools for clients to trade wherever they are.
What Does Binary Options Mean?
“Binary options” means, put very simply, a trade where the outcome is a ‘binary’ Yes/No answer. These options pay a fixed amount if they win (known as “in the money”), but the entire investment is lost, if the binary trade loses. So, in short, they are a form of fixed return financial options.
How Does a Stock Trade Work?
Steps to trade a stock via a binary option;
- Select the stock or equity.
- Identify the desired expiry time (The time the option will end).
- Enter the size of the trade or investment
- Decide if the value will rise or fall and place a put or call
The steps above will be the same at every single broker. More layers of complexity can be added, but when trading equities the simple Up/Down trade type remains the most popular.
Put and Call Options
Call and Put are simply the terms given to buying or selling an option. If a trader thinks the underlying price will go up in value, they can open a call. But where they expect the price to go down, they can place a put trade.
Different trading platforms label their trading buttons different, some even switch between Buy/Sell and Call/Put. Others drop the phrases put and call altogether. Almost every trading platform will make it absolutely clear which direction a trader is opening an option in.
Are Binary Options a Scam?
As a financial investment tool they in themselves not a scam, but there are brokers, trading robots and signal providers that are untrustworthy and dishonest.
The point is not to write off the concept of binary options, based solely on a handful of dishonest brokers. The image of these financial instruments has suffered as a result of these operators, but regulators are slowly starting to prosecute and fine the offenders and the industry is being cleaned up. Our forum is a great place to raise awareness of any wrongdoing.
These simple checks can help anyone avoid the scams:
- Marketing promising huge returns. This is clear warning sign. Binaries are a high risk / high reward tool – they are not a “make money online” scheme and should not be sold as such. Operators making such claims are very likely to be untrustworthy.
- Know the broker. Some operators will ‘funnel’ new customer to a broker they partner with, so the person has no idea who their account is with. A trader should know the broker they are going to trade with! These funnels often fall into the “get rich quick” marketing discussed earlier.
- Cold Calls. Professional brokers will not make cold calls – they do not market themselves in that way. Cold calls will often be from unregulated brokers interested only in getting an initial deposit. Proceed extremely carefully if joining a company that got in contact this way. This would include email contact as well – any form of contact out of the blue.
- Terms and Conditions. When taking a bonus or offer, read the full terms and conditions. Some will include locking in an initial deposit (in addition to the bonus funds) until a high volume of trades have been made. The first deposit is the trader’s cash – legitimate brokers would not claim it as theirs before any trading. Some brokers also offer the option of cancelling a bonus if it does not fit the needs of the trader.
- Do not let anyone trade for you. Avoid allowing any “account manager” to trade for you. There is a clear conflict of interest, but these employees of the broker will encourage traders to make large deposits, and take greater risks . Traders should not let anyone trade on their behalf.
Which Are The Best Trading Strategies?
Binary trading strategies are unique to each trade. We have a strategy section, and there are ideas that traders can experiment with. Technical analysis is of use to some traders, combined with charts, indicators and price action research. Money management is essential to ensure risk management is applied to all trading. Different styles will suit different traders and strategies will also evolve and change.
There is no single “best” strategy. Traders need to ask questions of their investing aims and risk appetite and then learn what works for them.
Are Binary Options Gambling?
This will depend entirely on the habits of the trader. With no strategy or research, then any short term investment is going to win or lose based only on luck. Conversely, a trader making a well researched trade will ensure they have done all they can to avoid relying on good fortune.
Binary options can be used to gamble, but they can also be used to make trades based on value and expected profits. So the answer to the question will come down to the trader.
Advantages of Binary Trading
The main benefit of binaries is the clarity of risk and reward and the structure of the trade.
Minimal Financial Risk
If you have traded forex or its more volatile cousins, crude oil or spot metals such as gold or silver, you will have probably learnt one thing: these markets carry a lot of risk and it is very easy to be blown off the market. Things like leverage and margin, news events, slippages and price re-quotes, etc can all affect a trade negatively. The situation is different in binary options trading. There is no leverage to contend with, and phenomena such as slippage and price re-quotes have no effect on binary option trade outcomes. This reduces the risk in binary option trading to the barest minimum.
The binary options market allows traders to trade financial instruments spread across the currency and commodity markets as well as indices and bonds. This flexibility is unparalleled, and gives traders with the knowledge of how to trade these markets, a one-stop shop to trade all these instruments.
A binary trade outcome is based on just one parameter: direction. The trader is essentially betting on whether a financial asset will end up in a particular direction. In addition, the trader is at liberty to determine when the trade ends, by setting an expiry date. This gives a trade that initially started badly the opportunity to end well. This is not the case with other markets. For example, control of losses can only be achieved using a stop loss. Otherwise, a trader has to endure a drawdown if a trade takes an adverse turn in order to give it room to turn profitable. The simple point being made here is that in binary options, the trader has less to worry about than if he were to trade other markets.
Greater Control of Trades
Traders have better control of trades in binaries. For example, if a trader wants to buy a contract, he knows in advance, what he stands to gain and what he will lose if the trade is out-of-the-money. This is not the case with other markets. For example, when a trader sets a pending order in the forex market to trade a high-impact news event, there is no assurance that his trade will be filled at the entry price or that a losing trade will be closed out at the exit stop loss.
The payouts per trade are usually higher in binaries than with other forms of trading. Some brokers offer payouts of up to 80% on a trade. This is achievable without jeopardising the account. In other markets, such payouts can only occur if a trader disregards all rules of money management and exposes a large amount of trading capital to the market, hoping for one big payout (which never occurs in most cases).
In order to trade the highly volatile forex or commodities markets, a trader has to have a reasonable amount of money as trading capital. For instance, trading gold, a commodity with an intra-day volatility of up to 10,000 pips in times of high volatility, requires trading capital in tens of thousands of dollars. However, binary options has much lower entry requirements, as some brokers allow people to start trading with as low as $10.
Disadvantages of Binary Trading
Reduced Trading Odds for Sure-Banker Trades
The payouts for binary options trades are drastically reduced when the odds for that trade succeeding are very high. While it is true that some trades offer as much as 85% payouts per trade, such high payouts are possible only when a trade is made with the expiry date set at some distance away from the date of the trade. Of course in such situations, the trades are more unpredictable.
Lack of Good Trading Tools
Some brokers do not offer truly helpful trading tools such as charts and features for technical analysis to their clients. Experienced traders can get around this by sourcing for these tools elsewhere; inexperienced traders who are new to the market are not as fortunate. This is changing for the better though, as operators mature and become aware of the need for these tools to attract traders.
Limitations on Risk Management
Unlike in forex where traders can get accounts that allow them to trade mini- and micro-lots on small account sizes, many binary option brokers set a trading floor; minimum amounts which a trader can trade in the market. This makes it easier to lose too much capital when trading binaries. As an illustration, a forex broker may allow you to open an account with $200 and trade micro-lots, which allows a trader to expose only acceptable amounts of his capital to the market. However, you will be hard put finding many binary brokers that will allow you to trade below $50, even with a $200 account. In this situation, four losing trades will blow the account.
Cost of Losing Trades
Unlike in other markets where the risk/reward ratio can be controlled and set to give an edge to winning trades, the odds of binary options tilt the risk-reward ratio in favour of losing trades.
When trading a market like the forex or commodities market, it is possible to close a trade with minimal losses and open another profitable one, if a repeat analysis of the trade reveals the first trade to have been a mistake. Where binaries are traded on an exchange, this is mitigated however.
Spot Forex vs Binary Trading
These are two different alternatives, traded with two different psychologies, but both can make sense as investment tools. One is more TIME centric and the other is more PRICE centric. They both work in time/price but the focus you will find from one to the other is an interesting split. Spot forex traders might overlook time as a factor in their trading which is a very very big mistake. The successful binary trader has a more balanced view of time/price, which simply makes him a more well rounded trader. Binaries by their nature force one to exit a position within a given time frame win or lose which instills a greater focus on discipline and risk management. In forex trading this lack of discipline is the #1 cause for failure to most traders as they will simply hold losing positions for longer periods of time and cut winning positions in shorter periods of time. In binary options that is not possible as time expires your trade ends win or lose. Below are some examples of how this works.
Above is a trade made on the EUR/USD buying in an under 10 minute window of price and time. As a binary trader this focus will naturally make you better than the below example, where a spot forex trader who focuses on price while ignoring the time element ends up in trouble. This psychology of being able to focus on limits and the dual axis will aid you in becoming a better trader overall.
The very advantage of spot trading is its very same failure – the expansion of profits exponentially from 1 point in price. This is to say that if you enter a position that you believe will increase in value and the price does not increase yet accelerates to the downside, the normal tendency for most spot traders is to wait it out or worse add to the losing positions as they figure it will come back. The acceleration in time to the opposite desired direction causes most spot traders to be trapped in unfavourable positions, all because they do not plan time into their reasoning, and this leads to a complete lack of trading discipline.
The nature of binary options force one to have a more complete mindset of trading off both Y = Price Range and X = Time Range as limits are applied. They will simply make you a better overall trader from the start. Conversely on the flip side, they by their nature require a greater win rate as each bet means a 70-90% gain vs a 100% loss. So your win rate needs to be on average 54%-58% to break even. This imbalance causes many traders to overtrade or revenge trade which is just as bad as holding/adding to losing positions as a spot forex trader. To successfully trade you need to practice money management and emotional control.
In conclusion, when starting out as a trader, binaries might offer a better foundation to learn trading. The simple reasoning is that the focus on TIME/PRICE combined is like looking both ways when crossing the street. The average spot forex trader only looks at price, which means he is only looking in one direction before crossing the street. Learning to trade taking both time and price into consideration should aid in making one a much overall trader.
Binary Options Trading: An All or Nothing Gamble?
Binary options trading sounds too legit to be anything but above board. After all, this involves publicly traded stocks and commodities. Lately, however, it has been criticized as nothing more than gambling, pure and simple, yet the buzz around it is getting louder and the promise of easy money is attracting the attention of people from all walks of life. What is it, really, and is it something the ordinary weekend investor like you and me should even care about?
What are binary options?
Binary is an apt adjective for this type of option. In programming parlance binary used to describe either of two states. 1 or 0. In the sports betting industry binary options are also popular – win or lose. In other words, there are only two possible outcomes. There is some basis to this all or nothing description of binary options trading. Here’s a short explanation of how it goes.
Take the price of any asset at any point in time. You make an intelligent guess on whether this price will increase or decrease over a specific period of time and bet $100 that you guessed right. If you are you win back your bet and plus a pre-agreed amount. If you’re wrong you lose almost all of your $100.
Of course it’s not as simple as that. In fact, there’s serious math behind binary options and people who engage in binary options trading, like all others involved in financial markets, are pretty confident that their numbers are better. Because in a single binary option trade, the outcome for the participants is also binary. One loses, one wins.
Let’s get a bit more technical than the simple explanation above. As currently practiced, binary options trading involves three main components.
First, there is an underlying asset, the future value of which becomes the basis for the trade. This asset can be the price of a specific company’s stock. It can be a traded commodity such as gold. Recently, there was an industry filing at the Commodities and Futures Trading Commission to allow exchanges to offer binary options for future box office receipts of certain films.
Second is the direction of trade. This is your guess of what the price of the asset will be at a specific point of time in the future and you make your trade based on whether this price will be above or below the current price at the time that the binary options contract was made. Third is, of course, the amount you wish to trade.
A binary options glossary
Like most specialized fields, binary options trading has its own jargon. These words are borrowed from the more established practice of commodities and futures trading, and gives binary options an aura similar to that of derivatives.
Current price. The price of the underlying asset.
Strike price. The price of the underlying asset when the binary option is purchased.
Expiry price. The price of the underlying asset at the time of expiry of the binary option.
Call option. The right to buy. In binary options trading, the purchase of an offer is an exercise of the option. In American exchanges this is termed as “Finish High” because the motivation behind a call is the probability that the price of the asset when the contract expires will be higher.
Put option. The right to sell. This is also exercised when the offer to sell an option is taken. This is called “Finish Low” in American exchanges because a put is based on projections that the price of an asset will be lower when the contract expires.
In-the money. A successful trade wherein a call option expires above the strike price or a put option expires below the strike price.
At-the-money. A trade in which the price during expiration is identical to the level during purchase. In some binary options contracts, such a scenario requires the initial investment amount to be fully returned to the customer.
Out-of-the-money. A failed trade wherein a call option expires below the strike price or a put option expires above the strike price.
Essentially, “options” is a misnomer for these types of transactions. “Lock” (another type of derivative) would have been the more appropriate term because once the deal is sealed, both buyer and seller are obliged to comply with whatever conditions were agreed upon to take effect at the contract’s expiry.
One other thing to remember is that trading in binary options only involves the price of underlying asset, but not the asset itself. You might be trading binary options for the price of Google or Apple stocks or gold, but there is no assumption that the seller owns any of these assets or that that you will when the contract expires.
What makes binary options attractive?
Fixed risk and reward. Most binary options are Fixed Return Options (FROs) in which the gains and losses (the risk-reward ratio) are predetermined. You know exactly what you’ll earn should you be in-the-money, or what you would otherwise lose if you happened to be out-of-the-money. In a $100 trade, for example, many options offer a return of 81% for a successful trade. Many also offer to return 10% of the purchase amount should your trade be out-of-the-money.
Capped risk. You will never lose more than what you’ve invested, which is all too possible in other investments like foreign exchange or real estate.
Assured reward. By the same token, gains are not dependent on the price of the asset during expiry. Regardless of whether the increase in price is a fraction of a point or double the strike price, the winner gets the entire payoff amount.
Simpler to understand. In binary options trading you only need to sense the direction of the price of the asset you’re trading. With regular options, you need to know both the direction and the magnitude of the price.
High level of sophistication. While easier to understand than most options, binary options still offer enough freedom for the application of sophisticated investment strategies. Investors in the forex market use binary options to hedge against their currency investments by investing in an opposite direction to their traditional forex position. Regardless of whether prices rise or fall, they’ll have their losses covered or might even profit from their binary options position.
Shorter durations. In some exchanges, many contracts close within the day. Some durations last for only an hour so the gratification (or mortification) is instant. It is possible to participate in many options within a single trading day.
Potential to profit from both falling and rising markets. In regular stock and commodity markets, money is made only when the price of the asset is rising. Binary trading allows an investor to absorb some of the market’s risk and make money regardless of whether prices are falling or rising.
Access to multiple markets. From a single account, you can have access to a wide range of markets and asset classes including forex, shares, commodities like oil futures and stock indices.
Other types of binary options
Binary options can either be cash-or-nothing, where a fixed amount of cash is paid out. It can also be an asset-or-nothing option where instead of cash the value of the underlying asset is paid out. Aside from these basic types, there are other more exotic binary options that are a bit more complex but follow the same general concept.
Barrier options are options that depend on a specific price level for their existence within the duration of the options contract. They can disappear (knocked out) or appear (knocked in) when a specified price level is breached. In partial barrier options, the price is monitored only for a specific window within the duration.
In a double barrier option, there is both an upper and lower price barrier and the double knock ins are activated or a double knockout terminates the option if any of those barriers are hit. The more complex double barrier binary option, of which there are 28 types, combines the characteristics of both barrier and binary types.
Are binary options a safe investment?
As with any other form of investment, risk is inherent in binary options. In fact, websites that guarantee returns are the ones you should stay away from. There have been complaints of payoffs not being remitted to bank accounts, so you’ll need to do due diligence before committing. The best idea is to always go with one of the best binary options brokers that you know are legitimate and reliable.
If you’re serious about trying binary options trading out, selecting a reputable trader is the first critical step. There has been a proliferation of trading websites online and it can be quite confusing to know which is legit and which is not. Start with traders registered with the Chicago Board Options Exchange (CBOE) or the American Exchange (Amex) to be sure that the firm you’re dealing with is subject to regulation. Fixed return options are more common in Europe and are traded in European exchanges heavily, thus the nickname European options. There have been reports of Europe-based sites engaging in unauthorized binary options trading.
The financial crisis of 2008 has awakened every American to the very real threat Wall Street presents to their personal financial health. The clamor for financial reform has resulted in the Dodd-Frank Act being passing into law in 2020. However, regulation for binary options trading is not explicit in the implementing rules and guidelines although proposals for rule changes have been discussed in the Securities and Exchange Commission (SEC) and predate the creation of the Dodd-Frank Act. For now and until the rules are in place, prudence in this investment area will always be your biggest safety net.
Are binary options a good investment?
Yes, if you have the stamina to monitor prices closely, the diligence to study the history and performance of the underlying asset you’re trading, and no past history of compulsive gambling.
Forbes columnist Gordon Pape issued a strong warning against binary options. He claims that this form of trading appeals to the online poker crowd and market junkies who tend to be more exuberant in taking chances than the ordinary investor. In fact, he refuses to acknowledge binary options trading as legitimate investment. He insists that it is a pure gambling activity where the odds are stacked against the investor.
Gordon Pape claims, as do others, that you need to win 54.5% of the time to just break even. For some, these odds are good enough, even if the house gets the better deal. For the house, it’s like having hundreds of slot machines that won’t ever pay out a jackpot. For the investor, on the other hand, binary options multiplies his chances of winning each time he cranks the machine. Not the jackpot, maybe, but big enough if one keeps at it and does the homework.
The Best Binary Options Broker 2020!
Perfect Choice For Beginners!
Free Demo Account!
Free Trading Education!
Get Your Sing-Up Bonus Now!
Only For Experienced Traders!