Binary options have been around for quite some time now, but recently more and more traders are turning towards this simple and innovative trading alternative. Originally known as digital options, binary options allow traders to profit simply by determining whether or not a stock, commodity, or currency will go up or down in value during a specified timeframe. Still not sure if binary options trading is right for you? Here’s a closer look at binary options and how to trade them on today’s brokerage platforms.
What Are Binary Options?
Classified as exotic options yet incredibly easy to understand and simple to use, binary options provide traders with access to stocks, commodities, indices, and the foreign exchange, allowing them to potentially profit from any market activity. While there are several types of binary options, the high-low option, or fixed-return option, is by far the most popular.
When utilizing this type of binary option, a trader profits by wagering correctly on the direction of a stock, currency, index, or commodity at the time of expiry. If correct, the trader earns a fixed return. If incorrect, the trader loses his or her investment. In other words, it doesn’t matter how much an asset moves up or down, only whether or not it’s above or below the strike price when the option expires.
Trading High-Low Binary Options
As you can see, the beauty of high-low binary options lies in their simplicity. When trading this type of option, you would purchase a “call” option if you believe the asset is rising or a “put” option if you feel it will fall. In order to profit from the put option, the price of the asset must fall below the strike price upon expiry. With reputable brokers like UltraTrade, the expiry, strike price, risk, and payout are clearly disclosed prior to the trade.
Example of a High-Low Binary Option
According to your analysis, the S&P 500 is primed for an afternoon slide. However, you’re not quite sure how much it will go down. Therefore, you decide to purchase a binary put option on the index. Currently, the S&P 500 is sitting at 1,700. So, by purchasing a put option, you’re betting the index will be below 1,700 at expiry.
Typically, you can choose an expiry time anywhere from 60 seconds to months down the line, and while the specifics differ from broker to broker, the minimum investment for a binary option contract is usually $10.
Continuing on with the high-low binary option example, let’s say you decide to invest $100 in a put option that expires in one hour. Let’s assume the last quoted price of the S&P 500 prior to expiry was 1,698. Based upon this, you would keep your original investment of $100, plus earn 70%, or $70. Had the S&P 500 finished above 1,700, you would lose your entire $100 investment.
One Touch Binary Options
High-low binary options are by far the most common, but international brokers often offer other types of binary options like “one touch” binary options as well. As their name suggests, one touch binary options only require the price of an asset to reach or touch a specific price target one time prior to expiry in order for the trader to profit. Traders can pick a target price above or below the strike price, resulting in the purchase of a one touch put or call option.
Range Binary Options
Another option to consider is the range binary option. This type of binary option allows you to select a price range you believe an asset will remain within until the option expires. If the price remains within the selected price range, you receive a payout. If the price moves out of the range, however, the entire investment is forfeited.
Binary Options Trading Success
Competition amongst binary options brokers is reaching an all-time high as more and more people are realizing just how easy profiting from binary options can be. Today, there are dozens of quality binary options brokers out there vying for your attention, loyalty, and hard-earned money.
As a result, many brokers are offering an increasing number of products with fixed payouts up to 500%, providing traders with a much better risk/reward ratio and allowing them to earn more on their trades than ever before. Some brokers even allow traders to exit trades prior to the option expiry. While this usually results in a lower payout or small loss, the flexibility it provides is an added safeguard and a great way to reduce trading losses.
Whether you’re ready to take the binary options market by storm or simply looking to make your first buck online, choosing the right broker will be the key to your success. Now that you know all about binary options, it’s time to do just that and begin profiting from this increasingly popular modern investment method.