Being a relatively new form of financial trading, understanding what binary options are is imperative to build a successful trading career. Compared to other forms of financial trading such as Forex and Stock trading, understanding how binary options work is fairly easy. Today, we have created an article on binary options specifically custom made for beginners. Having said that, if you are already trading binary options, feel free to check out our other articles on binary options as well as our unbiased broker and software reviews.
What are Binary Options?
Binary options are trading contracts where the buyer has the right but not the obligation to exercise an option. Binary options are usually referred to as all or nothing trading contracts. Basically, by entering into a contract with a binary options broker, you can either lose the entire investment or win a handsome payout. However, if you are lucky enough, some brokers may offer a refund in the event of a lost trade. Even though binary options were incepted in 2008, they have been in existence for a very long time. Initially, they were mainly traded over-the-counter and were reserved for the elite members of the society and institutions such as banks. As of today, anyone can trade binary options, anytime and from anywhere.
What you need to trade binary options
On the onset of a trading career, you will need to find a broker to be able to access a trading account and a trading platform. With access to a trading platform, you can trade financial securities with the options provided by the broker.
Unlike in stock trading where a trader is required to have a sizable investment before delving into trading, you can start trading options with as low as $1(You heard me right!).However, the starting capital is always hinged on the binary options broker chosen. You will also need a stable internet connection since modern options are traded online; either by use of desktop web applications or mobile devices. And again, it all boils down to your broker.
How binary options work
As mentioned earlier, learning the ropes in binary options trading is a piece of cake. This is mainly because it involves predicting the direction of price movements of the underlying assets. You are only supposed to predict if the price of the selected asset is more likely to rise or fall in preset time frames known as expiry durations. If you predict the market price to fall, you buy the PUT option and CALL option if you anticipate the price to rise. As simple as that!
The outcome of a binary options trade is determined by comparison of the expiry price (price of an asset at the lapse of a trading duration) and the Starting price. If for instance, you predicted a decline in the market price the expiry price should be lower than the price at the start of the trade. The same applies if you predicted a positive change in the market price of the asset; the expiry price should be higher than the starting price.
A binary options trade can have two outcomes. A trader can either lose or win a trade. A trade is said to end out of the money if the initial prediction does not come to fruition. In simpler terms, a trade has an out of the money outcome when the market moves against your initial predictions. In case of an out of the money outcome, you lose the invested funds either wholly or partially depending on a broker. A trade is said to end in the money when your initial predictions materialize at the expiry of a trading contract. An out of the money outcome attracts a sizable payout as agreed with the broker at the start of a trade. Payouts usually range between 60-90% for standard trades and they can sometimes be as high as 1000% for high-risk trades. In some instances, although they are rare, the market price of the asset can remain constant and such trade is said to end at the money. In case of an at the money outcome, the broker refunds the invested capital and hence a trader makes zero profits or losses. Interestingly, the magnitude of price change does not affect an outcome of a trade. Even if the price of an asset change by 0.001 to favor your predictions, rest assured you will win the trade.
Types of binary options
Apart from the classic Call and Put options, there are more options offered by binary options brokers. However, it is worth noting that the numbers of options offered vary from one broker to another. Meaning, you can find one broker offering an option but lack the same option on another broker’s platform. One of the options offered by binary options brokers is the High/Low option which is strikingly similar to Call/Put. With range options, a trader is required to predict whether the market price of the underlying asset will be within a given range of limits at the expiry of a trading contract (my favorite).Touch and No Touch options, on the other hand, require a trader to predict whether the price of an asset will hit or not hit a set target price. Binary options brokers may also offer option builder option. With this option, a trader can customize his/her own option with preferred settings. An option created by option builder has to be accepted by a broker before it goes live.
Is Trading Binary Options Easy?
Trading binary options are very simple (theoretically!) but do not let the simplicity fool you. There is more to trading binary options successfully other than predicting the direction of price movements. The truth is, binary options trading is like any other financial trading market with a substantial amount of risks. Therefore, as a beginner, you should take your time when choosing a broker and use a demo trading platform (if provided) to learn the ropes before using a live trading platform.