Binary options represent an ever-popular trading instrument among a great number of retail traders in the market today. Binary options, as the name suggests, offers the buyer to outcomes in relation to the price action of an underlying asset – a payout on direction and movement over a given time frame. A binary option can be used to predict whether price (of an underlying asset) will rise or a fall beyond a certain point know as a strike price. While mainstream investors actually buy or sell the asset and follow its value until they decide to close out (sell or buy), binary options traders trade a contract on the market with a fixed potential payout and fixed risk which is the price of the option. This means that the profit and loss in trading the asset is determined purely on the changing value of the price of the particular asset. Binary options traders who predict the asset’s performance over a given time period (without actually acquiring the asset) only need to achieve price at or beyond a certain level (up or down).
- Bet on a price of an asset going up or down, or staying in a range
- Risk only a fixed amount
- As with the risks, gains are limited as well with binary options trading
Therefore, investors who trade the underlying asset will profit from price movement in their favour, with gains unlimited while their risk is defined by their stop loss limits placed in the market. As the word binary itself denotes, there are only two outcomes to the trade. If the price moves the way of the option holder, a set payout is received, if not, then the option expires worthless and the buyer receives nothing and loses the premium paid (cost) of the option.
Strike Price, Payout Offer, and Expiry Time
There are several key components to a binary option trade: strike price, expiry period and payout offer. The expiry period is the length of time the contract is set to last for. Expiry is the period from the point you buy the option to the point it closes, and it can be as short as a minute and as long as a month or, in some cases as long as a year. Expiration times for binary options are usually shorter than with traditional options and many traders opt for trades in short-term periods, often buying options in several instances.
The strike price is the price you intend the asset to move above or below (for directional binary options) during the expiry period and determines whether you receive payout otr not. The payout offer is the return the broker offers you if your trade is successful. Offers will differ from broker to broker as their individual probability calculators will be individually set and determined. Some brokers may also offer return percentages the event of a losing trade, but is likely to be offset by the return on a ‘winning’ trade.
- Expiry period: the length of time for which you are predicting a movement
- Strike price: the level that price will have to move above or below to achieve payout
- Payout offer: the amount you stand to profit if you make the correct prediction
The strike price is the price you entered the trade at, meaning that’s actually the target which determines whether your trade is a winner – depending on your decision and if the value of the asset falls below or rises above it. The payout offer is the return the broker promises if your trade is successful. Offers largely differ from broker to broker and some companies offer return percentages in case of losing too, but this always affects returns in case of a win too.
Binary Options Trading: Call or Put
When choosing a directional binary option, there are (naturally) two options available: a Call or a Put. A Call is an option with a strike above which you predict or expect the asset price to move above, and if this closes above the strike at expiry (European style option) then payout is made as agreed at the outset. A Put is the direct opposite, in that the buyer chooses a strike below which he believes the asset price will move. A close below this strike price will then achieve payout.
At this point, readers should note that if the predicted move is correct, the payout is no more or less than that agreed at the outset. Should a trader choose to trade the spot market, if price moves significantly beyond his determined level ( reflected in the strike price), then he or she can achieve a greater reward based on the risk set by the disciplined use of a stop loss limit.
Types of Binary Options – Assets
There are a number of different asset classes offered by various brokers around the world on which one can trade binary options. Most companies offer these options on stock market indices, individual stocks, commodities and of course, currencies. Indices (or a stock index) are representations of the component assets and show the performance of an asset class as a whole. These are popular bases for binary trading. The most commonly traded are S&P 500, Dow Jones, NASDAQ, DAX, FTSE 100, Hang Seng and Nikkei. The most commonly traded commodities include gold, silver, oil, and copper.
Individual stocks are also available to trade through binary options, and offer the trader a chance to focus on specific sectors in the indices. The largest companies available to stock options traders are companies like Microsoft, Google, Coca Cola, Toyota, and Vodafone, to just name a few. Finally, currencies are common and very popular asset for binary options trading where brokers offer the major and a few exotic currency pairs, including US Dollar, Euro, UK Pound Sterling, Yen, and more.
Choosing Your Binary Options Broker
Choosing your broker is a very important part of your binary options trading system. You have to consider different factors when considering a broker and research the best companies that can offer you everything you need.
Finding reliable and reputable broker is paramount for your trading success
Look for brokers who are regulated
Find a broker who has a wide range of asset classes to cover.
Brokers who offer a wealth of educational material and good customer support
It is advisable to look for a broker that offers a Demo Account to help you familiarise yourself with the market and trading instruments.
Binary options are financial instruments which carry risk and as such they have to be regulated, and a reputable will be covered by this supervision. This should be an key consideration to any, and especially new binary options traders, when choosing a broker. Other aspects to keep in mind are assets in offer, broker bonuses, account types, fees, educational materials, and of course customer care.on
As said, one of the main aspects in choosing a broker is the regulation. Having a regulatory body cover a broker of your choice provides more security and protocol which will protect the trader. In 2012, there were some significant changes to the global understanding of binary options as it was classified as a financial instrument. This brought binary options brokers in Cyprus directly under regulation of the Cyprus Securities and Exchange Commission (CySEC). Thus, CySEC has become the first EU regulatory body for binary options trading and its license is accepted by all EU countries, though CySEC regulated brokers do not offer trading to US clients. Other prominent binary options regulatory authorities include Financial Conduct Authority (FCA) in the UK, Australian Securities and Investments Commission (ASIC), Investment Industry Regulatory Organization of Canada, and Commodity Futures Trading Commission (CFTC) in the US.
Platforms and Features of Binary Options Trading
A suitable and user friendly trading platform to execute your trades is important to traders for obvious reasons. There are several criteria you have to consider when choosing the software, including the interface, instruments, safety of your data, and technical support. You should look for a simple and solid interface with a straightforward design and all features should be easily accessible. Safety and data encryption are an absolute necessity as well as conformity to all regulations and no room for manipulation. You should also look for a platform offering good and timely technical support, as it is important for a trader to be able to quickly and appropriately address any potential issues.
The better binary options platforms will offer a simplified system which suitable for both beginners and experienced traders. Ultimately, your broker will offer all the necessary features as well as the full range of binary options types. We recommend the list comprises of:
Account Types and Deposit Bonuses
Most brokers will offer different account types with different features based on the deposits a client makes. With account types varying from broker to broker, you will need to meet certain deposit requirements to qualify for different account types: Different accounts also come with specific features and bonuses that accompany them.
- Do your research on account types offered by different brokers
- Look for a broker that offers a Demo Account to get you going
- Find good deposit bonuses, but make sure to read the fine print
It’s very important to research the account types and the actual offer which can usually be found on the broker website. Best brokers will provide educational materials as well as demo accounts with all types of accounts, where some of them will even offer free and no deposit demo accounts for you to check out the platform and the trading experience they provide. Deposit bonuses are often related to the deposit amount and the account types, where brokers allow up to 100% deposit bonuses. It’s always important to consider all details of the bonuses as these are often tying and have requirements for releasing and withdrawing the money.
High / Low (or Call / Put)
High/Low is a basic instrument, where based on the current value, the user decides whether the market will go higher or lower above or below the current or pre-set (strike) price.
Touch / No Touch
This is instrument is based on a target price, where the buyer decides whether price will reach the target (price) or trigger within the expiry period.
Boundary Options (also Double One / No Touch)
Boundary options or a Double One or No Touch option is based on two barrier limits or triggers forming a range or boundary, where the trader decides whether the market value will remain inside or outside of he range within the expiry period (American style) or after at expiry (European style).
Most brokers will offer different account types with different features based on the deposit a client makes. With account types varying from broker to broker, you will need to meet certain deposit requirements to qualify for the various account types: Different accounts also come with specific features and bonuses that accompany them.
- Do your research on account types offered by the different brokers
- If you find a good deposit bonus scheme, make sure to read the fine print
It is vitally important to research the account types and the details of the offer which is found on the broker website. The best of brokers will provide educational material as well as demo accounts with a variety of binary options, and will offer the opportunity to try their trading platform (with a demo account) without the need to deposit funds. Deposit bonuses are often related to the deposit amount and the account types, where brokers can offer up to 100% deposit bonuses. Once again, read the small print – you should always consider the details of the bonus as they may tie you in to certain requirements for releasing and withdrawing the money.
Educational Materials for Binary Options Trading
Educational material on trading binary options can be considered as an important part of the overall customer care and this shows the broker is allowing the client every opportunity to improve their trading style, understanding and ultimately chances of success. Most brokers offer free material, as well as extensive training programs, webinars, and account managers, with either standard and/or ‘VIP’ accounts. It is important to note that you become a part of a trading community with any broker and that you can get high-quality advice from other traders just by building connections.
Most regulated brokers offer good quality customer support, with well trained staff offering a competent and timely service 24/5 (24/7 in some cases). The best binary options brokers offer support via e-mail, live chat, and telephone, often with toll-free lines. Check the customer support quality and timeliness before choosing and registering with a broker.
Choosing When to Trade
Once you have decided on a binary options trading broker, having opened an account with funds deposited, you will want to know everything you possibly can about the market you are trading in. As well as knowledge on binary (options) trading, you will want as much information on the assets (and related industry) you are trading on. Try to get as many news and information channels as possible, covering all stories that can affect the value of the markets you are trading in.
At times, you may find that trading in options is not the best way to react to news and data, and this is an important part of know when to trade options and when to choose the underlying market directly. As attractive as options can be, straight forward spot trading will often give you the best opportunity when reacting to news and events in a dynamic market.
- Always try to pick up on as much information as possible from various sources
- Keep an eye out for breaking news that could influence particular assets
- Be prepared to react quickly
Many brokers will offer their own or imported news feeds which are, of course, highly useful, but we would recommend having your own news channels selection also.
Understanding the Risks of Binary Options Trading
One of the main reasons binary trading became so popular is due to the fact that you don’t need to buy or sell the underlying assets, and the risks as well as the potential payouts are defined at the outset. That said, the rigid risk to reward profile can be restrictive. Trading the underlying assets with disciplined stop losses can afford you the same measured risk, but with the added incentive that profits will be unlimited should the market move in your desired direction. As safe as they may be, there are well principled ways to achieve the same results, if not better in the direct (underlying markets.
- Binary options trading does not come without its risks.
- Sometimes there are better opportunities trading the underlying asset.
- Always monitor your trades – measure their performance against an equivalent spot position in the underlying asset
- Pick the assets you know best and stick to them
Binary options clearly give the trader – especially beginners – a pre-set layout of the risk (cost of the option – known as a premium) and the potential payout. This gives the trader the comfort and security of knowing the limits of what they can lose – and also the maximum amount they can gain. However, there are risks to be aware of. Due to the limited payout, inexperienced traders may get in the habit of trading too often – a common mistake and this can spiral out of control. As stated, the risk you take on binary options is capped, but so are your gains. Once the asset price goes past your strike, you get the same payout offer no matter how far it moves in your favor. This can lead to traders choosing to take on many options as the price moves higher or lower. In this instance, we can see that taking a position in the underlying spot position can yield greater returns, as the price can continue to move in your favour from your initial trade – with stop in place of course. Choose when to trade – it is important.
The Bottom Line
Binary options have been highly popular financial instruments, where based on a ‘yes or no’ option you get a fixed payout offer and have both risk and potential reward limited. This attracted many new traders to venture into binary options trading, without directly purchasing or selling the assets and taking on the associated risks. However, as we have defined above, there are risks to trading binary options as there are in any financial instrument. It may be simple to decide on the asset you want to trade, pick a direction, set a certain expiry time, and set out the amount you want to risk, but this can also be achieved when trading the underlying spot position. The underlying assets for trading include commodities, indices, stocks, and currencies, though only a certain number will be available to trade ‘under’ binary options. Winning returns can be as much as 70% to 85% for some option contracts from prominent brokers, but these kinds of returns can also be earned in the direct markets – again, using discipline and rigid stops (to limit risk). Brokers may also offer a lose payout with some of these earning you up to 15%, though as mentioned earlier, this tends to affect the payout amount if the option ‘wins’. Although the binary options seem very simple and easy to conduct, it is important to do your research to see if these instruments fit in with your strategy. To be profitable you will need a reliable strategy, and also to learn how to trade with discipline, whatever instrument you choose to use.