Binary options trading can be described as financial betting. You know the exact pay out, and either you bet correctly and profit or you’re off the mark, and you lose your whole investment.
After such a description, it shouldn’t be a surprise to hear that binary options were considered gambling products and they were licensed by the UKGC up until 2018.
Binary options gained significant traction in 2008, and today they’re the simplest trade method. Read on to learn the basics of binary options trades – what they are, how they work, and why they’re so popular.
What Are Binary Options?
A binary option is a specific form of financial investment known for being high-risk but also high in yield. There are three important aspects of binary options trades:
- The underlying market – you can choose to trade commodities, indices, stocks, forex, or cryptocurrencies
- The strike price – traders must determine where the price of the asset will lie respective to the strike
- The expiry date and time – a prediction either needs to come true in the period up to the expiry date, or it needs to hold true at the expiry time. This depends on the type of trade
Binary options are straightforward. A trader predicts where the price of an asset will lie with respect to a predetermined price point (the strike) by a certain time (the expiry).
How Do They Work?
Before you make a prediction, the trade details are all clearly established. You’ll know the price, possible pay out, and expiry date. With all the information, you’ll have a clear risk indicator.
It’s an exotic option involving different types of underlying assets and is available in various financial markets. It’s called a ‘binary’ because it consists of a choice between only two options. The option will either expire in the money or out of the money, and you either make a fixed profit or incur a loss.
Different types of binary trades pose different questions, but it always boils down to a “yes or no” answer.
Types Of Binary Options
As simple as binary options are, there is a range of different trading types you can make. It’s up to you to know your preference.
Call or Put
Traders tend to start with this basic type of binary option. You look at an asset and consider whether it will be trading for a higher or lower price at the time of expiry.
These are also known as high/low or up/down trades. If you think the asset will trade above the strike price, you buy a call option; if you believe the asset price will fall, you buy a put option.
When it comes to one-touch trades, you need to decide whether a given asset will reach a trigger point within a certain timeframe. The further away that point is from the current price, the riskier the trade and the bigger the pay out.
It’s enough that the price reaches the trigger point before the expiry time for you to profit – it doesn’t have to remain there.
There are also no-touch trades where you predict that the asset price won’t reach the trigger point.
Short-term and Long-term
Short-term trading can take as little as a minute. You buy options, and within a short timeframe, you see the outcome. While these can work well for certain people, don’t jump in too eagerly. Fast-paced and high-stress options don’t fit every personality type.
On the other hand, long-term trades can take days, weeks, or even months. They provide an opportunity to get more reliable data on which you can base predictions.
Boundary trades are also known as tunnel or range trades since you predict that a price will remain within a certain range. In this case, you have two trigger points that the price must not pass during the expiry period; one is the lower end, while the other is the upper.
Why Binary Options?
Binary options offer:
- Simplicity – Binary options are straightforward, and the result is based only on direction
- Flexibility – Traders can access multiple financial markets
- No fees or commissions
- Little financial risk
These are only some of the advantages behind binary options trading and the reasons that it’s grown in popularity.
Trusted Options – Your Reliable Online Broker
When you’re trading, you’re risking your hard-earned money, so you should be able to trust your broker. With Trusted Options, one of the most trusted binary trading brands, you’ll be using a regulated platform that does its best to ensure your funds are safe.
Start trading on a platform that you trust and get help from our various resources and tools. Contact us for more details or join over 1.7 million traders and start an account!