A lot of people have heard of binary options, yet most of those folks do not know what they really are. In short, they are a type of trading that allows you to use an asset’s price movement to make a profit on in an either/or way. Only one of two outcomes is available, hence the term “binary.” As such, you can make a previously determined amount in profit, or lose what you risked. In this respect, it is similar to gambling, but only when it comes this far. Unlike gambling, you have information at your disposal that can help you to be more accurate with your predictions, and if you use this info, the “house” does not have the advantage as the casino does. By approaching binaries as a trading venture, and not as a gamble, you are giving yourself a big advantage when it comes to making money in the financial markets.
There are several types of binary options, but the most widely used and recognized is the call and the put option. The call is what you use to say that you think the asset will rise in price, and the put is for a downward prediction. If you are right, even by a single pip or penny, then you receive the full amount that is stated before you finalize your contract. If you’re wrong, you lose everything, unless your particular broker offers a rebate on losing trades. There are a variety of binaries ranging from one touch, boundary, to pairs, but all of them pay in a similar fashion, making them true binary options despite their exotic nature.
This type of trading is unique because not only do you know how much you will profit by before you begin, you know exactly how long it will take to get there, too. You can choose the timeframe that you wish to trade, and these range from 30 seconds up to a year in length. Some of the more popular trades are 60 second options, 15 minute, week long, and month long. The best part about this is that you can determine the length before expiration based upon your knowledge of the asset you are looking at, which if used right, is yet another advantage you are giving yourself.
What You Need to Know
There are a few terms to understand before you begin in addition to the basic financial jargon. You need to know what the expiry is first. This is the time at which your contract ends and your trade ends. The price at this precise moment is what will determine whether or not your trade was a successful one.
And to know if it was successful, you need to know what the strike price and the expiry prices were. The strike price is the price of the asset when you began, and the expiry price is the final price. Where you stand at the end will be based upon the relation of these two prices to each other.
So, let’s say you bought a 5 minute option on the Dow Jones index. The strike price was 17,800.00, and when the five minutes were up, the expiry price was 17,800.10. If you had a call option, you would finish “in the money” and receive a full profit. If you were “out of the money” because you went with a put option, you would lose what you risked. Again, only one of two things can happen, making binaries extremely easy to understand. You don’t need to worry about how many shares you bought or broker commissions. Just take the profit rate agreed upon and apply it to the amount you risked. If you had put up $100 with an 80% rate of return, a correct trade makes you $80.
If you were trading with a more exotic type of option, you would simply take the rules for that type and apply it. With a boundary trade, for example, you would see if your price finished inside or outside of the range you were given and go from there. With a one touch option, you look to see if the asset hit the price that you were keeping in mind during the life of the contract.
Time to Decide
Binary options have a lot of potential for profits, but unfortunately, not everyone uses them this way. By educating yourself thoroughly in respect to both the assets that you will be trading, and the binary market as a whole, you will be doing yourself a great service, increase your profit rate, and enter an area where few traders have gone before: a zone where you can focus on your trading for a living and reach financial independence more quickly. Of course, this isn’t the end goal for everyone that uses these, but the potential is there if you want to take the extra effort to get there. Anyone with $250 in expendable income can be successful here, which is quite different from any other type of trading that currently exists. Perhaps for this reason alone, binary options are gaining in popularity on a daily basis.