Binary Options Recap

Binary Options Recap

Submitted by adil on Wed, 06/18/2014 - 19:06

Let's Recap on Everything We've Learned!

In the beginning, professional investors and financial institutions were dominant in the financial market as they were the only ones who could trade in the market. But with the passage of time, technology and internet introduced the concept of currency trading. However, understanding of the market was one crucial element that was required by individuals as they were new to the concept of currency trading. The risk for the new entrants increased multiple times due to the leveraged trading as they could lose more money than they invested.

Binary options are one of those financial instruments that are available in the financial market for many years and traders can purchase it over-the-counter directly from the party that sells it. In 2008, these financial instruments were officially listed in the US market. As a result, many brokers started providing online services for binary options. The structure of these derivatives made it even more possible for them to be traded in the financial market because it was easier to invest in these instruments. Moreover, the benefit of earning higher returns within a short span of time was one of the factors that created a successful binary options market.

What is Binary Option?

These are the contracts that determine the price movement of the underlying asset, such as, stock, commodity, currency or index, over a certain period of time. Binary Options offer a fixed return. There is an element of duality, meaning, there can only be two results derived from this contract and this is the reason why it is called ‘Binary’.

Investors earn a predefined return on their investment if the contract ends ‘in the money’, but lose a fixed portion of their originally invested money if it expires ‘out of the money’. They are also known as All-or-Nothing options, fixed return options, and digital options.

Binary options consist of the following four elements:

Asset

They are commonly known as the underlying asset. When an investor invests in the binary options, they do not actually purchase the underlying asset and do not have any rights to own them. However, they purchase the option to buy the underlying asset. As already discussed, the list of assets consists of market indices, commodities, government bonds, currency pairs or stocks.

Length of the Contract

Every contract has an expiry period. As compared to the traditional contracts which require a period of several months to produce the required return, the expiry time of these options is as short as five minutes and can go up to seven days.

Investment Amount

Another element of these options is the investment amount. The amount of the trade is always specified to traders when they place a trade in the financial market. However, unlike the traditional contracts, one of the advantages of binary options contract is that a trader never loses more than the original amount they invested.

Prediction

The final element of these derivatives is to make a prediction. A trader predicts the direction of the asset price movement before or at the end of the expiry period.

It can be done via three methods. In the first method, a trader selects the ‘high’ if he expects that the asset price will be higher than the current price at the end of expiry period and select ‘low’ if he thinks that the asset price will be lower than the current price at the end of expiry period. This method is called ‘The High/Low instrument’.

The second method involves ‘Touch’ and ‘No Touch’. This is the reason why it’s called ‘The Touch/No Touch Instrument’. In this method, traders select ‘touch’ if they believe that the asset price will touch the target limit before the end of expiry period, but select ‘no touch’ if it doesn’t touch the target price limit before the expiry period.

The third method is ‘The Boundary Instrument’ in which a trader selects ’In’ if he believes that the asset price will close inside the defined upper and lower price limit at the end of expiry period. And selects ‘Out’ if he believes that asset will close outside the upper and lower limit of the target price at the end of expiry period.

Why Trade Binary Options?

Some of the main reasons why investors prefer to trade in binary options are as follows:

Simple to trade – These instruments allow you to trade in the financial market even when you do not have any experience of the market. All you need to do is to make a simple yes or no decision and you are ready to play the market.

Regulatory environment – These instruments have recently been regulated and now you can execute the trade in more protected and safer environment.

Less exposure to risk – There is no concept of leverage in these financial instruments and a trader only loses the amount he invests in case he suffers a loss. Therefore, binary options allow the user to determine the level of risk so they can manage the overall risk exposure.

Short expiry period – A trader can place numbers of trades in a day because the expiry period of binary options can be as small as 5 minutes, where a trader can close the trade to minimize its loss or maximize his profits.

Not expensive – One of the benefits of investing in derivatives is that you do not have to purchase the actual asset. Instead, you simply invest in the prediction of the movement of their price, which makes it possible for you to access the market that you previously could not afford to enter into.

High returns – One of the major reasons for their success is the fixed profit they offer. Even an option with 5 minutes expiry time can generate up to 50 to 90 percent of the money if the prediction is correct. It means a trader can earn great profits over a period of one day by placing hundreds of trades.

Profitable in any condition – Regardless of the market condition, the binary option trader can earn profit. The higher the volatility in the market, better chances of earning profit will there be as large shift in prices increases the chance of earning higher returns.