Binary Options, also known as Digital Options or All-or-Nothing Options, have been available to the public-at-large since 2008. Basically, Binary Options have two possible outcomes: “in the money”- when a specific asset reaches a certain value after the fixed expiry time and “out of the money”- exactly the opposite outcome. Binary Option Trading is a revolutionary way in which traders can achieve high returns within a very short period of time. In case the investment doesn’t expire “in the money”, some brokers give a specific percentage of the cash invested as a refund to the binary option trader. This refund can go as high as 15% of the original investment, so not all is lost if your option expires out of the money.
Is Binary Options a Scam?
Before starting to explain how binaries work, I have to address an important issue: Binary Options have been surrounded by a vibe of Scam right from the start and this makes a lot of people stay away from the industry. Here’s the long story made short: Binary Options are NOT a Scam! But some binary options brokers definitely are. Binaries are a legit trading instrument and cannot be called scam but to trade them, you need a brokerage and unfortunately, among these brokerages, there are a lot of scammers. This doesn’t mean that binary options are a scam, however, it does mean you must be extra careful with whom you are doing business with. Once you’re done reading this article, go over the how to avoid binary options scams guide.
Think about this: a guy sells you a fake iPhone, saying it’s the real deal. After a while, you realize you’ve just bought a fake and you’ve paid full price. Does that make Apple a scam??? NO! If someone sells you 14 karat Gold and claims it’s 22 karats, does that make Gold a scam??? See where I’m going? Binary options are not a scam, but some of the websites that offer them are scams. Open your eyes when reaching for the wallet.
How does Binary Options Work?
I’ll try two different explanations; the first will be broader for those of us who don’t really understand what Binary Options are all about. Plus, a video below.
The Binary Options trader uses a wide range of assets, from Forex to Stocks, Indices and Commodities. These are commonly referred to as underlying assets because the value of the option is derived from their value, making underlying assets the backbone of binary option trading and we win or lose out on binary trades based on the movement of these underlying assets. Basically, a trader speculates that the price of X asset will be above or below the opening level at expiry time and if he is right, he will receive a specific, prearranged profit. Let’s say, I speculate Google will be above X value within one hour (X is the opening price level of Google), I will put my money on the Call Option (in contrast to the Put Option – when I speculate that the asset price will be below X value). If the Google stock is just one point above X value when my option expires, one could generate up to 85% profit from the investment. Many brokers will refund up to 15% of the investment loss in case I was wrong in my speculation.
Nowadays, with the Binary Options market growing rapidly, traders have many more trading options, such as Boundary Options, Touch Options, Up/Down, and the more recent type of fast trading called 60 Seconds trading where all options expire after one minute, so you could potentially increase your account balance almost faster than you can say “I love Binary Options Trading”. Each category of options is slightly different from the others in terms of its properties. Our readers can find more information about the different trading tools and options, by having a glance at our binary options glossary.
How are Binary Options Traded? Simple Explanation
David is the average trader. He keeps track of many American and Far Eastern markets. He checks out the live, online financial news; sometimes he even reads financial magazines. Today, David was checking out Reuters when he saw something about a rush for gold in India. Immediately, David checked with his favorite Binary Options broker, and started looking at the gold charts over the past few hours. The gold value was 1733.01 points. David speculated that in exactly one hour the gold value will exceed 1733.55 points, and so he decided to invest $100 for the option to gain 75% return from his investment. David checked the Call Option, and then started biting his nails. After 45 minutes, the gold value was still less than 1733.55 points, but David had faith in his choice. Two minutes before expiry time the numbers were still not so good for David. Egad! After exactly one hour, the gold value reached 1733.62 points. “Bingo!” David shouted while checking his account balance, which was now $75 higher. In case David was wrong and the gold value was lower than the expected value, he would have received up to 15% return from his losses, so his choice wouldn’t have been a complete loss.
How to Trade Binary Options in 3 Simple Steps
Although the explanation above is pretty straightforward, I want to make sure that everyone understands how easy it is to place a binary options trade, so I will use a visual representation – yea, pictures:
Step 1: Pick an Asset
All brokers will display the available assets in an easy to access and easy to see list. It may be placed to the right, or to the left, but you will definitely see it. In this case it is to the right.
Step 2: Choose Direction (Call or Put)
Once you’ve decided what you are going to trade, it’s time to decide if the price of that asset will be higher or lower at expiration time, compared with current price. Look at the blue line on the chart – that represents current price (of course it looks different on other platforms but it’s very easy to identify). If you think the asset price will be above (higher), you will choose Call and if you think it’s going to be below it (lower), you will choose Put. Remember, Call is for above, Put is for below.
Step 3: Choose Expiration and Investment Amount
Now that you’ve decided on direction, you have to choose an expiration time. These are usually preset by the broker so you will only be able to pick from a given list of expiries. In our example we are trading Short Term options so we can pick between 30 seconds, 1 minute, 2 minutes, 3 minutes or 5 minutes. In other words, we have to answer the question “Will my asset be higher or lower than current price after 30 seconds, or 1 minute, or 2 minutes (etc.)?” When the 30 seconds (or whatever expiration we have chosen) have passed, we will know the outcome: if price is higher and we’ve chosen Call, we win. If price is lower and we’ve chosen Put, we win. Any other scenario means we lost the investment but, as stated above, some brokers offer a refund of up to 15% even if your trade wasn’t successful. Next you have to choose how much you want to invest on the trade. This depends on your money management rules, your skill as a trader and how much “trust” you have in the trade. Picture coming up:
Step 3.1 – Open Trade
Some brokers let you choose Call or Put, expiration, investment amount and have a separate button to open the actual trade that activates only when all parameters are set. On other platforms (this is the case in our example), once you click Call or Put the trade will be opened automatically. If you are trading on such a platform, make sure you set everything up before hitting Call or Put.
Where Can I Trade Binary Options?
To trade binary options you will need to open an account with a brokerage. Since 2008 when binary options became available to the large public, brokers have started to appear and they never stopped. Nowadays, literally hundreds of such brokers are operating and just waiting for you to open an account. Registration is free of charge and all you have to pay is some bank transaction fees (in some cases) and of course, the money you want to invest. Be careful though because not all of these brokers are trustworthy. We recommend you choose one of our Recommended Brokers or at least a regulated one. Also, before you venture into the binary options industry we advise you to read our articles on How To Choose Your Binary Options Broker and Binary Options Regulation – Everything You Need To Know.
When Can I Trade Binary Options?
Some markets are open for the entire 24 hours, 5 days out of 7 (the currency market is a great example) so you can trade whenever you feel like it, no matter the time zone you live in. However, stocks and indices have specific times when their markets are open so you will have to check with your broker to see what those times are. To make the story short, you can trade whenever the respective market is open ;)
Who Trades Binary Options?
Newcomers to trading, ex FX traders, gamblers. Anyone can trade binary options. It’s not a discriminatory industry, meaning that you don’t have to have some special training or degree or stuff like that. If you are a plumber and today you decide you want to trade binary options, you can do it by tomorrow (or even the same day if you move fast). However, I wouldn’t recommend such a move because – just like almost everything else – binary options trading needs training. It’s better to spend some time educating yourself and then invest money, not the other way around. It’s all about training and because we know that, we’ve put together a huge Binary Options School – Free, of course!
Why Trading Binary Options?
Firstly, I would like to state strongly – Binary Options are based on speculation. Nothing is for sure and winning is a possibility not a certainty. Nevertheless, Binary Options trading definitely adds an extra dimension to speculation because there are so many trading tools and trading options that it is quite possible that one could make a correct speculation. Binary Options trading is mainly based on research and a certain amount of knowledge (about the markets and assets), but it is also strongly based on risk management. What I’m saying is that one is not required to become a Forex market guru to trade Binary Options, but he needs to be knowledgeable, alert and aware. To begin with, Binary Options require only a small level of investment but give a very rewarding level of return. Online platforms have made the trading of Binary Options easier because any trader across the globe can trade Binary Options and receive the needed information for trading. Making a few smart and profitable investments while losing some other minor investments could generate high profits in a short amount of time. Binary Options trading is breathtaking, profitable and fun. As the Binary Options industry is growing, trading has become more popular and far more advanced. Always keep in mind, however, the road for high profits starts with a trusted Binary Options Broker that fits your needs as a trader.