What are binary options? The answer to this question could fill a book but I will, hopefully, be able to answer a few questions asked by nearly everyone newly interested in trading binary. The very short answer is that they are a simplified form of trading blah blah blah but you can get that on any website. They are a simplified form of trading but they are not necessarily simple, you still have to make accurate analysis of the underlying market. What makes them easy is that binary options are simply a yes or no bet on whether a chosen asset will rise or fall in price, much different than trading standardized options, futures or forex. These bets have been happening on the sidelines of the world’s financial markets since rice futures were first bought and sold in feudal Japan. Today binary options exist across the internet in a variety of forms and are gaining popularity daily. They are called binary because there are only two possible outcomes once you buy the option, it will lose or it will win. This means that profits as well as losses are known when you enter the trade and do not change during the life of the option.
Modern binary options came into existence around 2010, I can’t say for sure but that is close enough. Some website may lead you to believe that the US CFTC created them and that it is the end-all be-all source for everything binary, but rest assured it is not true. This does however raise the first of many important things to know about binary options. There are two kinds, CFTC binary options and everything else. CFTC binary options are complicated trading vehicles that are hard to use and hard to access. Everything else are the online, web based binary options brokers you have probably seen on the internet. They are an off shoot of forex trading and are a gamble based on the spot price of an underlying asset. When you buy a call on gold its price at that time is your strike price. If gold moves up you win, if gold moves lower you lose. The major difference between this type of trading and forex is that profits and losses are set at time of purchase at not open to indefinite profits or losses.
Everything else includes some different kinds of binary but they can all be summed up in four words; CySEC Style Binary Options, also known as off-shore, digital and high/low binary options. This category includes both regulated and non-regulated binary options but all offer the same basic trading and have platforms that look something like this;
Not all brokers are exactly the same, which is why it is important to check into a few before getting started with trading. They don’t all have the same assets, the same expiry times or even the same features so comparison shopping is king when it comes to choosing which to trade with. When it comes to brokers there are two basic types; white labels and proprietary platforms. White labels are companies built on identical technology and may or may not be owned by the same parent company. SpotOption and TechFinancials are two well known binary options platforms. Proprietary brokers are those who use their own, in house, binary options trading technology and are unique in the world of trading. Brokers that use their own technology include AnyOption and StockPair. There are pros and cons with either type of broker but that is for a different article.
There are four things that you must do in order to trade binary options; choose an asset, pick a direction, choose a trade amount and an expiry time. There are dozens, if not hundreds, of tradable assets ranging from commodities like oil and gold to forex pairs like USD/JPY and EUR/USD and major world stock indices like the S&P 500, XETRA DAX and Nikkei 225. Once you have chosen your target market and have a trade idea you choose which type of option you want to buy, usually calls or puts but can also be high or low. The price of the underlying asset at the time you buy the option is your strike price. The beauty is that it doesn’t matter how much the asset price moves, so long as it finishes above or under your strike as needed at time of expiry.
Above is an example of a SpotOption based broker, EmpireOption. I have pointed out expiry, trade amount, strike price and the expected payout. Expiry is another one of the choices you will have to make and is based largely on what expiry are available from your broker. Some allow short term trading with expiry ranging from 60 seconds to 2, 5 and 10 minutes out to one hour, 4 hours and/or end of the day expiry. Some allow expiry tomorrow, end of the week, end of the month and other longer term expiries. Still others provide a combination of both which is best for the all-around trader. The trade amount is the final step before purchasing your option. This is usually an arbitrary amount, picked by you, and not based on any underlying value in the option. It is in effect how much you are going to bet on whether the market performs as you expect. Once you enter this number all it takes is a simple click of the button.
After the option is purchased you must wait until expiry to receive pay out. At this time you either win or you lose. Most binary options will lose 100% of their value at expiry if out of the money but some will provide a small amount of return. On average, winning binary options trades pay about 80%. There are other forms of binary trading that pay higher. These include range, boundary and one touch style options. These all require the asset price to perform in a specific way by a certain time and pay all-or-nothing at expiration.