Binary Options are a form of simple fixed reward contracts. In binary options, a trader’s profit or loss is fixed. Like the name implies, binary options provide only two choices for the trader, and they need to pick one or the other choice which have only two outcomes. It is a simple and straightforward trading arrangement. In recent times, binary options have become very popular due to the ease of using binary options trading platforms. Perhaps, binary options trading will become the online trading of choice in the near future.
In binary options, the most straightforward trading is one offering an up or down binary option.
In an up or down binary option, you want to bet against the chances of a commodity’s price, e.g. price of coffee changing in one hour. If you believe the price will increase, you place a “call”, and if you think it will decrease, you place a “put”. If you predicted correctly, you win and may get payouts of up to 90 percent of your investments, or you lose your investment. When the trade expires in one hour, you are in the money if you won, or out of the money if your guess was wrong.
Here is an example showing trading Sony Stocks using the Up/Down Binary Option
Based on your analysis of the market trend, you believe that Sony’s stocks will rise, and that it will be trading at $400.55 or more as of 3:00 pm EDT today. You decided to trade on the belief that the price will go up or remain at that price and place a “Call” binary trade with an investment of $300. One of the best things about binary options is that your loss is limited to the amount of money you are risking against the trade. You can’t lose more than the money you risked against any trade, and your risk and returns are predetermined.
For this trade, your payout is 80 percent, and you have a 10 percent rebate or return in case you lose. So you are risking $300 on this trade, and if you win, you get $300 plus 80% of 300 = $240. $300 plus $240 = $540. This is what you get if you won the trade. Most of the reputable binary options trading platforms offer 70%-90% payouts. If you lose, you get $30 payout which is the 10 percent rebate.
The price you believed Sony’s stock would close above $400.55 is known as the “strike price” and the date and time you selected your trade is known as maturity date or expiry date. You win the trade if the stocks exceed $400.55 before the expiration time and you will be in the money. If the trade finishes below the strike price, you lose and are out of the money. Whatever the case, your payout reflects in your balance almost immediately. It is that simple.
Regardless of how far Sony’s stocks close above the strike price, your result is still the same. It only needs to cross the strike price, and you are in the money. This is one of the reasons why many traders love binary options because everything is clear-cut.
This type of trade is the most common in the binary options market. It is called an up/down binary option, or cash or nothing trade. You either make your money or lose out completely. But there are many other types of binary options trade. They all offer two choices where you either pick one or the other and they come with a fixed risk or return. Here is some information about them.
This section will focus on the most popular types of binary options trades, and how traders use them to make huge profits that could be as much as 80 percent or more in some cases. Always remember that binary means one or the other, i.e. you have to choose between one of two options. This concept apply to every type of binary options available. Also, you will also get a list of some of the best binary options brokers the industry has to offer.
There is a wide variety binary options trade’s classification. They all have the one or the other trait in common but have slight differences in the type of payout, trading conditions, and more. Binary options are now a trending topic nowadays, with many brokers promising huge returns on investment from binary options trading. Here is a more explicit explanation of binary options.
Binary options trades are investments which carry a predetermined reward and risk. Binary options are also an alternative way of investing in an underlying financial instrument such as commodities, stocks, currencies, as well as many other assets in the form of binary options. Binary options here, refer to the method of trading an underlying asset.
While binary trading has gained wide acclaim in recent years, many options traders are not aware of the benefits. With binary options, you are sure of what you are getting if you win or lose, and they can choose from a wide variety of binary options to execute their trading strategies.
Calls or Put – Up or Down
These binary options are the most popular among binary options traders owing to their simplicity and ease of execution. They belong to the cash or nothing category of binary options as the trader either gets a cash payout or nothing when trading terminates.
Call options or digital options are one of the simplest binary options. Investors place a call option if they think that the price of an asset will rise during a stipulated period. For the call option to be a win, the price of the traded asset must move above the price of the asset when the bid was placed. That price is called the strike price.
In a put option, the investor is banking on the belief that the price of a traded asset will decrease below the strike price at the termination of trading. If the prediction is correct, the investor receives the full payout of the trade.
This trading method can be called call/put, up/down. Or a high/low binary options. Most binary options broker platforms offer this instrument, and it is considered as one of the simplest form of binary options.
To be more exact, a call is a contract whereby one party agree to sell its stake in an asset at a preset price to another party. The buyer makes a profit if the price of the asset increases. In a put option, the buyer of the asset profits if the price of the asset decreases.
These type of binary options use price boundaries or ranges. If a trader can predict correctly whether an asset’s price will fall within or exceed a predetermined range, he or she will receive the payout offered on the trade. If the prediction was wrong, the trader forfeits his or her investment, unless a rebate is available for the trade.
These are usually called boundary betting or tunnel bets, and involves the investor choosing whether an asset’s price will remain at a particular price range when trading expires. Traders also refer to them as in and out betting because they involve betting on whether the price will remain in or outside of the range.
Range options involve considerably higher risks than the call/put binary options, and are not as common, although they offer substantially higher returns which can exceed 300 percent of the trader’s investment
Touch or No Touch Options
These binary options involve guessing correctly whether an asset’s price will touch or not touch a certain price, i.e. if the price reaches a particular value. If your prediction was correct about the asset’s price touching the target price, you would receive the return at the expiration of the trade. If your guess was wrong, you would be out of the money when trading expires.
This trading instrument is also common and simple to execute. You place a touch if you believe the asset price will reach or touch the target point in a specific time frame. If you guess correctly and the price touches the target, you win, and the trade expires automatically. You place the no-touch if you believe the asset price will not reach the set price. If the price doesn’t touch the barrier for the duration of trading, you have won. But if the price touches the price target during the trade, you have lost, and the trade closes automatically.
These binary options operate on the same principle as the touch/no touch options, but instead of one price barrier, two are used. Two price points are representing the high and low price barriers within which the asset’s price moves. You win or lose if you can predict whether the price will touch either of the price targets.
If you chose the double touch option, you win if the asset reaches or exceeds any of the price barriers. If you place a no double touch, you will receive the returns on the trade if the price stays between the two target prices without touching any of them.
Based on the type of payout, binary options trades can be classified into two. One of these is the cash or nothing binary option in which the trader receives a fixed payout for a successful trade or nothing if the trade was a loss. Note that receives nothing doesn’t always mean the trader gets nothing, as some brokers offer returns or rebates which gives the trader a percentage of the risked amount of money they lost in a trade.
The other type of payout is the Asset or nothing. In this case, the trader receives the value of the underlying asset as a reward rather than a cash payout. These form of binary options are, however, not as common as the cash or nothing types.
Binary options can also be classified as American-style or European-style trades. In American-style trades, the trader wins once the underlying asset touches the strike price, and you don’t need to wait until the expiration of the trade. For European-style trades, the trader does not win if, at the end of trading, the asset doesn’t hit the strike price or stay according to your prediction. What this means is that if the asset hits the strike price during trading but changes position before the termination of trading, you have lost the trade. The European-style trade is more time specific.
While there are two types of payout methods which include the cash or nothing and payment with underlying assets, most binary options brokers offer the cash or nothing binary options.
Cash or money binary options simply mean that you either win or lose money. Except in few cases where brokers provide rebates on losses, most cash or nothing binary options work on the principle of winners getting payouts and losers getting nothing. But since some brokers offer rebates, the cash or nothing might not be completely true. For this option, traders receive a fixed percentage of their investment if their prediction was correct, and they lose their investment if their prediction was wrong.
By far, the most popular type of binary options are the cash or nothing types, and they are preferred because unlike many other types of binary options, the payouts and losses on the trade are known before placing the order.
Cash or Nothing with Rebates
Some binary options brokers provide rebates for buyers who lost their investment on trades. Most of these rebates range from five percent to 15 percent of the trader’s investment. So, if a trader invested $200 in a trade where the broker offers ten percent rebate and the trader was out of the money at the expiration of trading, the broker will return $20 to the trader as a rebate. If a broker doesn’t offer rebates, it tries to compensate its trader with higher returns, bonuses and other deal sweeteners.
Some binary options brokers have buy-out clauses that allow the trader to close a trade some minutes after execution. This option could be very valuable if you discovered you made the wrong call and let you minimize your loss by closing the trade before it expires.
This feature can also be used to take profits early in the trade before things go sideways. For example, you place a trade and it goes according to your prediction, but you feel the trend might change and you will lose your profits before the trade expires, you exercise this feature and take your profit, saving you from potential losses.
Some of these buyout clauses include AnyOption’s Take Profit feature and 24Option’s Early Closure feature.
Asset or Nothing Binary Options
In an asset or nothing binary options trade, a trader receives the underlying assets instead of cash payouts. For example, an investor trades an asset or nothing binary option on the stock of Amazon. If the trade was a win, the trader is paid with the stocks of Amazon equivalent to the cash payout of the trade.
There are different types of binary trade options, and they all have different rules and regulations guiding them. The rules may depend on where you are trading or the type of trading instrument. If the rules are related to the expiration time of trades, they are known as American-style or European-style trading.
While you now have the basic details regarding binary options, it’s not yet time to start trading. For you to trade binary options successfully, you must have reliable and consistent trading strategies. You need to do a lot of research, backtesting, and demo testing with a binary options demo account. If you can develop a trading strategy that consistently brings you profit, then you can start trading binary options and make huge profits.
Your choice of binary options broker might be greatly influenced by the types of binary options they offer. Most binary options brokers offer the high/low binary options, with only a handful providing high-yield options such as the boundary binary options.
If you are a beginner in the binary options trade, we recommend that you try out your skills with up/down binary options before trading high-yield options such as boundary binary instruments.
This article may also be interesting: Fixed Price – Guide for Binary Options.