Misconceptions about Binary Options

Let's Clarify What Binary Options is About

With the passage of time, the binary options market is expanding. But with the expansion, certain misunderstandings about binary options exist in the market. Therefore, it is important for traders and investors to know what binary options actually are so that they can effectively use it. Some of the most common misunderstandings about binary options are discussed below.

It is a Gamble

Binary option trading is not gambling. In fact, it is more like a yes or no trade where ‘yes’ indicates that you are in agreement with the fact that the market will reach a defined price before the expiry period, and ‘no’ indicates that you are in disagreement. Its price varies between 0 and 100. You can trade these derivatives in stock market, ETFs, futures and foreign currency market.

Binary options may also be used to provide hedge against the risk of loss, but the loss of binary options is limited. The time period of binaries is usually very short and you either earn profits or earn nothing at all.

Binary Options cannot be Sold

Another misconception surrounding binary options is that they cannot be sold, but this is not true. You can sell binary options. Being the buyer in the binary options market, you expect the market to move in the upward direction. So, in case the market goes higher than the strike price at the time of expiry, it is usually valued at 100 dollars. However, if there is a downward trend in the market and you believe that the trade will finish at or below the strike price at the time of expiry, you sell binary options and take the short position.

You cannot Exit Your Position before the Contract Expiry

You can exit your position before the contract expiry any time to limit your losses or secure early profits. When you enter into a binary options contract, the maximum risk exposure is your initial cost, so it can be said that there is either a short position or a long position at a binaries price. When you are in a long position, you expect the price to reach 100 and in the short position, you want the price to fall to zero.

They are not Regulated

Binary options traded outside the boundaries of the United States are not regulated, but there are 3 exchanges in the United States regulated by the CFTC. These exchanges offer traders and investors to trade in the binary options.

There is no Transparency

If binary options are being traded on regulated exchanges, accurate and timely information about all the trades is provided throughout the trading period because sellers and buyers are matched every time a trade is placed.

It has Huge Capital Requirements

There are regulated exchanges where you can open an account with as low as 100 dollars. However, you are required to have enough capital in your account so that initial cost and exchange fee can be covered because no margins are maintained when you are trading.

When you trade binary options, the risk and return are clearly established with how you place your trade by assuming that there will be favorable returns at the time of expiry.