To save you a lecture on the history of binary options, this is not a college lecture note anyway, we would get on with the meat about Binary Options, what it is, how it works, what it means for you, and how to get the most out of it.
Sounds like a plan, right? Well, let’s get into it.
What is Binary Options?
In simple terms, binary options refer to a two-way contract that has a fixed risk and fixed reward. To expatiate a tad bit, binary refers to two, like a computer’s binary code of 1’s and 0’s. Similarly, with binary options, the contract entails one of two options, up or down, touch or no touch.
How does Binary Options Work?
The idea behind Binary Options is simple, as have been described. Let’s take it further.
In Binary Options, there are:
- Assets—the quantity you trade—it may be a stock (APPL), currency pair(EUR/USD), or commodity (Gold)
- Expiry time—the timeframe for which a contract lasts—it may be 60 seconds, 60 minutes or more
- Choice—position you take—it may be either rise or fall (up or down), touch or no touch, or another form of binary options.
Together, these factors can make an unlimited recipes of scenarios that drives the multi-billion dollar Binary Options industry.
Say, the price of a stock (asset) is hovering at $50; you may choose to initiate a Binary Option contract that after 30 minutes (expiry time) the price of the stock will increase (choice). If after 30 minutes (on expiration) the price of the stock increases, you made a win (also referred to as in the money). If the stock price decreased, you made a loss (also referred to as out of the money).
An important thing to note is that, in Binary Options, the contract terms are very specific. For example, with the above scenario, the price of the stock has to be on the increase as at the time of expiry for your trade to be counted as a win. Even if the price increased prior to the expiry, but then made a dip as at the time of expiry to below the initial price as at the time you initiated the contract (also referred to as Strike Price), your trade will be counted as a loss. You get the scope? This is exactly the case for other contract types as well: the terms are very specific.
Because the terms of a Binary Options contract are very specific, Brokers offer a fixed reward (payout) for the fixed terms. Using the aforementioned example as a test scenario, let us assume that a trader opened a position with $200 for the increase of the price stock with a broker that offered a fixed reward of 80%. If the trader recorded a win, then the trader would get his or her $200 back, and a return of $160 (80% of $200), which makes for a total of $360 from that thirty minutes trade. If the trader recorded a loss, it is goodbye to the $200, with zero payout (some brokers, however, may return a percentage of your initial investment).
Therefore, it is just as easy to make a big win, as it is to make a big loss in Binary Options.
What does Binary Options mean for you?
Binary Options makes earning from the financial markets very easy. With Binary Options, you are able to trade a large variety of assets, using any of a few simple methods, in a short amount of time, and receive high guaranteed fixed returns should your predictions be true.
Good as it appears, these exact same factors also make Binary Options very dicey to trade. Unlike with other traditional ways of trading, like the stock exchanges and FOREX, there is very little window to take into consideration the large number of factors that influence price swings of assets.
Notwithstanding, what are the measures to take to ensure that you get the most out of trading Binary Options?
How to get the most out of Binary Options
- Do not start until you understand Binary Options and have a clear strategy on how to make consistent profits. Fortunately, many brokers offer Free Demo Trading Accounts to practice with before you gain enough confidence and expertise to back your predictions with your cash.
- Choose a reliable broker
- Adopt strict risk and money management strategies
- Review your trades regularly, learn from them, and apply what you have learnt into subsequent trades