An option is a financial derivative instrument that determinates a contract for a transaction in the future. The contract is settled on an asset at a reference price between two parties. The option buyer has the right to engage in the transaction (but he is not obliged to do so) and the option seller obligatory takes the responsibility for fulfillment of the transaction.
In financial markets, a binary option is a kind of option where the pay-out is either the definite amount of an asset or nothing. Generally, there are two major types of binary options:
- cash-or-nothing contract (the pay-out is the definite amount of cash);
- asset-or-nothing contract (the pay-out is the value of the implied stock).
It is usually not so easy to understand what binary options are and how the one can trade using such contracts. This article was not planned as a complete guide on how to trade binary options and should be considered as a short introduction to the business of binary options trading.
In the nearest past, trading binary or so called exotic options was not really popular and affordable for the vast majority of traders and investors over the world. They were traded by a small group of selected individuals who needed to hire a specialist and pay upfront fees for purchasing exotic options – it was not possible to buy them over the counter. Since 2008 the Options Clearing Corporation (OCC) start listing binary options over the counter and the American Stock Exchange followed thousands of traders providing them access to online binary option trading. Thus, nowadays trading binary options provided by various brokerage companies is exposed to everyone and everyone can find its own pros and cons of such modern alternative to speculation on the financial markets.
3 Major Elements for Trading Binary Options
- Binary option contracts can last from an hour to one month, although some brokers allow buying even shorter-term contracts (down to 5 min. before expiration). It is obviously very important to know the precise time that is left before expiration of the contract if you want to make righteous predictions and gain profits.
- Regarding the underlying assets, they usually include currencies pairs, stocks, commodities and indices. Thus many brokers offer a wide range of such assets to satisfy demands of various traders and when they become more acquainted with binary options provided by their broker’s platform traders often tend to trade with a specific, preferable underlying asset or market area.
- Making predictions (determining which direction the asset price will go before the contract expires) is the main job of any binary option trader. Practically is looks like that: a trader buy a Call option when he believes the price will rise and obtain a Put option if he thinks the price will fall. Right forecasts can help traders and investors earn high profits in a really short period of time.
Forex Binary Options
Taking into account that the foreign exchange (Forex) market is the most liquid market and is undoubtedly the most popular among traders all over the globe, dealing with the usage of currency trends is also possible via binary options platforms.
Trading Forex binary options shares the same principles as trading any other option (asset) types. For example a trader can predict if the GBP/USD exchange rate will be traded above or below the exercise price in a specific time period (remember, all binary option contracts have the expiration date). If a trader expects the British Pound to rise in value versus the USA Dollar he would make a Call option (buy pounds) and vice versa, if he thinks the Pound value will probably fall - he would make a Put option.
Trading Forex binary options have one significant advantage before usual and Spot Forex trading – no matter what, you can always earn or lose a fixed amount of money for every option contract. On the other part, spot traders must invest more to earn more that obviously increases the risk of losses and sometimes such losses can be absolute. So trading binary options should be considered as a good alternative for rookies.
As for the conclusion let us highlight such major advantages of binary options trading:
- despite numerous negative statements and rumors all over the network, binary options principles are easy for understanding;
- trading binary options is really simple and it is proved by thousands of successful traders, the fact is that to make any decisions the trader only needs to consider the asset price direction;
- the pay-out of a binary option is always fixed that means the possible loss and reward is preliminary known from the outset;
- after selecting a proper broker and establishing a stable internet connection the one can trade from any location with 24/6 (6 hours a day, all days except Saturday).
We consider trading binary options as an outstanding alternative to Forex and usual option trading. Such comparatively new kind of trading business can seem a bit confusing for the first sight but in fact is simpler in its principles and obviously safer than speculating on other financial markets. For those who want to try his skills on binary options trading, we strongly recommend picking Optionbit as a stable partner with a superb, modern trading platform.