What are Binary Options?
Trading in binary options is among the easiest ways to trade price fluctuations in a multiple global market. However, a trader should understand that there are also risks involved on this method of trading especially if you are not familiar with how it works. Binary options are totally different from the traditional options. When traded, you will find that these options have different fees, payouts and risks, and it also has an entirely different investment process and liquidity structure.
So you might ask, what are binary options? To address this question, you have to first understand that binary options are traded outside of the United States. They are often structured differently in the US exchanges as compared to other binaries.
When thinking of hedging or speculating, the binary options could be the best alternative, but only when the trader will be able to fully grasp the potential outcome of these options. As of June 2013, the US Securities and Exchange Commission has warned investors on the risks on investing on binary options and has even charged a company based in Cyprus for selling it illegally to US investors.
Binary options are classified as exotic options. Yet, despite of its “exotic” nature, its functionality is extremely easy to use and understand. The most common binary options are the high-low option which is also called the fixed return option. The reason is because such option comes with an expiry time and date and is also called a strike price. If the trader wagers correctly towards the market’s direction and the price during the expiry time are placed on the correct side of the strike price, then the trader will be fixed a return regardless of how often the instrument has moved. The trader who ended up waging incorrectly towards the direction of the market will lose his or her investment.
It is best to understand the process behind this. If the trader believes that the market is rising, he will have to acquire a “call”. On the other hand, if the trader believes that the market is falling, he must purchase a “put”. In order for a call to earn money, the price should be above the strike price during the expiry time. In order for a put to make money, the price should be below the strike price during the expiry time. The payout, strike price, risk and expiry will be disclosed during the trade’s outset.
For the high low binary options that are outside of the United States, the strike price will be the current price of the underlying financial product, like the S&P 500, Euro/USD currency pair or perhaps, a particular stock. Thus, the trader will have to wager whether the future price at the expiry will be much higher or lower than its current price.
Option is a kind of contract. But instead of being an obligation, it gives the buyer the right to buy or sell a certain asset at a certain price on or before a certain date. Just like a stock or bond, an option is a security. It is that binding contract that comes with strictly defined properties and terms.
So what is options trading? Basically, the concept behind options trading can be applied on various day to day situations. For example, you found a home property that you really love to purchase. Unfortunately, you do not have the available cash to pay for it for the next three months. So you talk to the seller and try to negotiate a deal that will allow you to purchase it in three months for a cost of $200,000. The owner agreed with such agreement, yet, you will have to pay $3,000.
The type of option where the payoff is structured is either a fixed amount of the compensation if in the event that the option expires in the money or nothing at all if such option expires out of money. Thus, the success behind binary options trading is mainly based on a “yes or no” proposition, which is why it is termed as “Binary”. The binary options automatically exercises, which means that the option holder will not have a choice to either buy or sell that particular asset.
Some investors may find that binary options is attractive all because of its simplicity, most especially since the investor should only come up with a guess whether something is specific and will happen or if it will not happen. To answer the question of what is binary options trading, let us cite an example.
For instance, a binary option could be as simple as whether the share price of X Company will cost more than $25 by May 22nd at around 10:00 AM. Now if the share price of X Company has reached to $27 at the stated time, the option will immediately be exercised and the option holder will earn a certain amount of cash.
When it comes to the question of what is binary options trading, it is important to keep in mind that binary options are totally different from the vanilla options. They are often traded on platforms that are regulated by the Securities and Exchange Commission and other agencies. However, they are most likely traded over the World Wide Web on platforms that exist outside of regulations.
Since these platforms operate out of regulations, investors are therefore at a greater risk to fraudulent transactions. Example, a trading platform of binary options might require that the investor will deposit a certain amount of money in order to purchase the option. If in case the option expires out of money or that the investor ended up choosing the incorrect proposition, then the trading platform might take the entire amount of deposited money without any refund provided.
Trading on binary options is just easy, for as long you understand the concept behind this. These days, there are lots of online resources that can help you to easily understand the concept behind binary options trading.