Binary Options Trading
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What are Binary Options?
Binary options are a relatively new investment vehicle in which a trader can bet on the asset displaying several price behaviours or not displaying such behaviours, and get a payout depending on whether the asset behaviour was correctly predicted or not.
The word ‘binary options’ means ‘two options’, meaning that at any given point in time, the trader has two options to choose from. Binary options go by several names. They are also called digital options, and because the returns on a trade are set before the trade is executed and cannot be changed, they are also called “fixed return options” or “forex options”. Binary options are also called ‘all-or-none’ options because of the nature of the payout: it is either the trade is in the money and the trader wins it all, or the trade is out of the money and he wins none.
The price of a binary bet is displayed as an index between 0 and 100. If the event which is being bet on happens, the bet is settled at 100, if it does not happen the bet will finish at 0.
The binary options broker will quote a price on the event and if the bettor thinks it will happen they will buy the bet, if they don’t think it will happen they will sell the bet.
The best way to explain this form of financial betting is to give an example of one of the most basic forms of binary betting and that is an ‘Up or Down’ Bet.
Imagine the scenario, it is 3.30 pm and the FTSE is currently standing at 5400. The market closed yesterday at 5425 and the broker that you are using is quoting the binary ‘FTSE to Finish Up’ price at 24 – 26.
In your opinion you believe that the FTSE will start to rise towards the closing stages of the day’s trading so you decide to buy the ‘FTSE to Finish Up’ binary at £20 per point at the price quoted of 26. In this instance your judgement proved to be correct as the FTSE finished at 5450 so you win £1480 (100 – 26) = 74 x20.
As long at the FTSE finished up the bet will be settled at 100, if it had not gone up your bet would have been settled at 0. So, if the FTSE had not gone up by the close of business on that particular day you would have lost £520. That is calculated by multiplying the price which is 26 by the stake which is £20.
Before you make a binary bet you will know exactly the maximum amount that you can lose which in this example is £520.
There are various other types of binary bet and the same principles apply to each, you are asked a question and the answer will either be right or wrong.
A one touch binary bet is if the underlying market will go through a set price before the expiry of the trade. If the market does go through this set price it will be settled at 100, of not the bet will be settled at 0.
The Ladder binary bet is decided on whether the market will end the period of the trade above a certain level. For example a ‘Wall Street to be above 12200 level’ bet will be settled at 100 if the market finishes above that figure or 0 if it finishes below it.
A Binary target bet is whether a particular market will end the trading period within a particular price range. As an example, Wall Street to Finish Up 20 – 40 would settle at 100 if the market finished the trading period between those two figures and would settle at 0 if it didn’t.
This type of Binary bet is simply if the high or low of an underlying market in a trading day will be a set distance from the high or low of the previous days trading.
This kind of Binary bet is whether the underlying market will trade between two barriers which are stated before the bet is made. The Tunnel bet might be that the FTSE will trade between +50 and -50 during the course of the trading day. If the market hits any of these levels throughout the day the bet will be settled at 0, if it doesn’t touch any of these levels it will be settled at 100.
Reasons to trade Binary Options
Binary option contracts are unique and have some characteristics that sets them apart from other financial instruments. Traders can trade assets in different asset classes, and the traders always have an expiry date or time. The trader is also put in a position where he knows exactly what the trade will cost him, and what he will gain or lose depending on the outcome of the trade.
There are many reasons why you should trade binary options. Binary options were licensed for the retail trading market the same year that the conventional markets went haywire after the collapse of the subprime mortgage industry in the US. Some of the reasons are as follows:
a) Less risky to trade
In the traditional financial markets, there are a lot of factors that traders must contend with. Leverage, margin, slippages, poor internet network and unscrupulous practices by some brokers can affect the trade outcomes, making forex and commodity trading some of the riskiest trading ventures to get into.
Binary options trading is devoid of some of these factors. There are no re-quotes, no slippages and no leverage or margin requirements to content with. There are also no margin calls.
b) More choice of what to trade
Some binary options brokers offer up to 90 assets. That is 90 different financial assets that can present an opportunity to make money at any given point in time. If the market saying about a bull market being in existence somewhere, you surely have better chances of finding such opportunities in the binary options market.
c) Reduced Cost of Trading
If you live in the US and trade forex, the new guidelines issued by the Commodities and Futures Trading Commission (CFTC) will require you to open an account with at least $25,000 for forex trading, and even more for options trading. With binary options, you can get into the market with as low as $100. YOU DO NOT NEED AN ARM AND A LEG TO TRADE BINARY OPTIONS.
d) Better payouts
The percentage profits that traders can earn are typically higher in the binary options market than in any other market. Payouts range from 70% to 90% in ordinary trades, and up to 500% in the speculative high-yield trades. Trades with shorter expiries can open up the opportunity to make even more money.
What is traded on the Binary Option Market?
Securities from several asset classes are traded in the binary options market. The asset classes are:
- Currencies (forex)
- Stock indices
Currencies are the commonest assets traded on the binary options market. They are traded on a 24-hour basis to reflect their 24-hour operational status. A wide range of currencies which include the major currency pairs and the Yen crosses are traded.
Stock indices commonly traded are:
- Dow Jones (US)
- NASDAQ (US)
- S&P500 (US)
- Xetra DAX (Germany)
- FTSE100 (UK)
- Zurich SMI (Switzerland)
- CAC40 (France)
- TADWUL (Saudi Arabia)
- MICEX10 (Russia)
- IBEX35 (Spain)
- Strait Times (Singapore)
- SSE180 (Shanghai, China)
- Tel Aviv 25 (Israel)
- Nikkei 255 (Japan)
- Hang Seng (Hong Kong)
There are others but these are the commonest you will see on most binary options platforms. Generally, stock indices are only open for certain hours of the day when the parent indexes are open for business.
Commodities are usually not well represented in the binary options market. But it is almost a constant for gold, silver and crude oil to be listed. Any other commodities added is a bonus for the trader. Commodities can only be traded when the parent markets traded on the floor of the Chicago Board of Trade (CBOT) are open for business.
Stocks should actually be number 2 on this list because so many stocks are traded. The exact list of stocks differs from broker to broker, but the common technology stocks of Apple, Microsoft, Google and FaceBook are familiar sights here.
Binary Options Brokers
When it comes to placing Binary Bets the crème de la crème of the Binary Betting brokers just has to be Banc De Binary. The betting interface is extremely straightforward to use and it is easy to see at any given time what the exact position of your Binary Bet is.