Binary Options – Understanding the basics

Binary Options Trading
Binary Options Trading

Binary options makes for a lucrative short term investment option that enables the investor to profit by correctly predicting the short term direction of the price movement on the underlying asset or security that is being traded. A relatively new form of trading that has evolved, binary options has taken the financial market place by a storm and quickly caught on in popularity. Binary options trading is the most simplified form of over-the-counter derivatives based trading, with the exception of NADEX (North American Derivatives Exchange).

Simple, easy and profitable; binary options, are also referred to as fixed risk options as they offer only 2 possible outcomes from a trade. Binary options evolved to eliminate the complexities of the traditional Call and Put options, also known as the vanilla options. Binary options is suitable for both beginners as well as an experienced investors that can generate decent returns in a short span of time.

Trading binary options is quite exciting due to the dynamics of the markets and the potentially high risk/high reward ratio and could perhaps be the most simplest form of financial trading available today. Indeed, what could be simpler than betting on whether the Apple’s share price will rise or fall in the next 30 minutes or in the next 30 days?

Binary options can be applied to the currency, stocks, indices and commodity markets as well, offering returns of anywhere between 71% up to 89% whilst offering up to 400% when trading other forms such as Touch trading.

Today there are over 100 different binary options brokers that offer the aforementioned form of financial trading, each adding their own flair to the trading platforms in most cases. Most have risen and fallen at the same pace, while some have managed to remain consistent.

Getting started with binary options

Binary options come with two possible outcomes. In the money and out of the money, or to infer in binary terms, 1 and 0. In order to initiate the trade, the investor has two options, CALL or PUT option.

A CALL option is placed when the investor is certain that the market price of the security being traded will rise higher than the current market price. A PUT option is the opposite to a CALL option. When trading on a security, the investor can either profit from the trade or lose the capital invested. Briefly put, binary options allows an investor to trade an underlying security and to speculate whether the security’s price will move higher or lower than the current market price during a specified duration which could be anywhere between 15 minutes up to a week.

To illustrate binary options with an example, a trader invests $100 in McDonalds whose current market price is $42 and places a CALL option. Assuming that the present trade has an expiry time of 45 minutes. The investor would profit 85% returns if their speculation came true towards the end of expiry or would lose their investment if their speculation was wrong. Some binary options brokers do tend to refund up to 15% of the initial capital in case the investor loses a trade.

First Binary Option - 60 Second Call and Put Options
First Binary Option – 60 Second Call and Put Options

Binary options – Exploring the markets

One important factor to understand is that when an investor is trading binary options, they don’t inf act own the stock, but merely profit or lose based on the price movement’s speculation. This makes binary options an exciting way to trade the financial markets. Imagine you were a big fan of Apple Inc. but either don’t have the time or the resources to own a few shares. Binary options can give investors the closest feeling by allowing investors to trade shares of Apple. Again, to re-iterate, investors don’t buy or own the shares but rather speculate on the market price movements.

This facilitates a world of choices for investors as most binary options brokers offer a big variety of securities to trade with. Ranging from IBEX (Stock exchange for Spain) to GAZPROM of Russia to commodities such as Coffee, Cotton and currency pairs such as the EUR/USD.

Profit from binary options trading

Binary options does indeed have a great potential for traders to make significant profits. While it is quite normal for even the most experienced investors who lose out on a few traders, the earning potential far outweighs the probability of binary options trading. Yet, the success largely depends on the investor themselves in the form of approach, discipline and strategy they bring to the table. Some if not most trade binary options on gut feel and it is this majority that tends to write off binary options. Yet there are far and more binary options investors who seem to profit most of the times.

The primary aspect of binary options is the speculation on the market movements. Hence it is imperative that the investor has a basic idea of the markets in order to trade binary options more efficiently. Be it currencies, stocks, commodities or indices, there is always a logic and a pattern to follow. Not to forget trading with a strategy in mind can greatly increase the chances of profits. sticking to one binary options broker always helps as it tends to make the investor more familiar with the price quotes being offered. Using trading strategies off the forex markets as well as reading the price charts is a good practice.

Binary Options – Risks and Rewards

To conclude, while binary options seem simple in their approach, in order for investors to profit from trading binary options the investor needs to have a basic idea on how the financial markets work as well as a basic to intermediary knowledge of various concepts used in forex trading. Binary options offer a great potential to make quick profits, and on the same note investors can also risk losing their capital as well as earnings when trading without having the knowledge or failing to follow a strategy or being disciplined. Binary options can be fun nonetheless and offers not just monetary rewards but also the excitement that comes only from the financial markets.

Start with a demo trading account at First Binary Option to get familiar with trading binary options.

Published by Editorial Team
ForexPromos Editorial Team is comprised of a selection of hand picked editors that bring you the latest breaking news from the financial markets. We also provide forex educative articles as well as comprehensive fx broker reviews.

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