How does it work?
WHY THEY’RE CALLED BINARY OPTIONS
Binary means two-piece, and binary used in this situation means that there are only two outcomes of your investment, whether you lose the amount you have invested or you win as much as you have wagered. Binary options are also known by other names, such as digital options, all or nothing options, or over/under options. All names refer, however, to the same type of binary options.
Binary options are all about speculation, not about any real purchase. When you want to trade binary options, you choose an underlying asset, such as a stock or currency, and speculate about whether its price will rise or fall during the term of your choosing. If you guessed right, you get back everything you have invested and as much again, apart from the percentage the broker takes.
THE DIFFERENCE BETWEEN REGULAR OPTIONS AND BINARY OPTIONS
A regular option gives you the right to buy or sell an underlying asset, usually a share. Normally, a single stock option gives the owner the right to buy 100 shares at a certain price. But with binary options you own nothing, instead you guess (qualified) whether the value of an asset will rise or fall within a certain time. Binary options are thus nothing you own, buy or sell.
Forex and currency trading is not binary options
Forex and currency trading can sometimes be confused with binary options. These are two very different things. When you trade in forex or currency trading, you buy and own currency. If you buy 100 euros, these are transferred to your account, and it’s your money. When you invest in binary options, you don’t actually own anything at all, it’s instead more like betting.
SOPHISTICATED AND QUALIFIED BETTING
Trading in binary options is not at all the same thing as buying options or engaging in stock trading, but more reminiscent of betting. But there is one big difference. When you bet a penny on which team will win the Swedish Cup in football, you’re leaving quite a lot to chance. Sure, you may have read up on which team has had the best performances during the tournament, but ultimately sport does rely on luck as well. With binary options, you can, by reading and learning more about how different markets work, build up a knowledgeable advantage. The better briefed and informed you are, the better your chances of investing in the right binary options. Additionally, binary options give a big return for those who predict correctly. Think about it, you actually have a 50% chance of winning every time. Which betting company or casino games give you those kinds of odds?
How do binary options work?
It’s easy to start trading in binary options. You do not need to have any prior knowledge, and all reputable binary options brokers offer plenty of training material for beginners, but also for more sophisticated investors. Once you have registered with a broker and made your first deposit, you are ready to start investing. The issues you then should consider are the following:
Underlying asset (currency, index, commodity or stock)
Time window (minutes, hours, weeks, months)
Choose “price increase” or “price drop”
If you think the price will go up, then select a call option. A call option gives profit or gain on a predetermined amount in case the price of the underlying asset (currency, commodity, etc.) at the option’s expiration is higher than the exercise price. If you think the price will go down, then it is best to choose a put option. A put option gives profit on a predetermined amount in case the price of the underlying asset is below the strike price.
Call options and put options with fixed maturities are the most common binary options. The exercise price is calculated at the same time as you buy the option and maturity is the time when the option expires.
Example: Let’s say you buy a call option exercisable by €100 on an asset. At maturity, the price has gone up to €120. Your option is then “in the money” and you have won on your option.
Available call and put options
There are four main groups of markets that will be eligible for trading of binary options, namely stock indexes, individual stocks, currencies and commodities.
Binary options stock index
All binary options brokers offer trading in binary options on at least a dozen of the major stock indexes in the world. For example, NASDAQ, DAX, FTSE, CAC, IBEX, OMX etc.
Binary options individual stocks
Here the focus is primarily set on larger companies that are listed on stock exchanges in New York (NYSE and NASDAQ), for example: Google, Samsung, Coca-Cola, Nike, Cisco, etc.
Binary options currencies
It was really for trading in currencies that binary options were first developed, and all brokers offer trading in the most common currency pairs. Some examples are EUR-USD, GBP-JPY, GBP-USD, USD-CHF, USD AUD etc.
Binary options commodities
Examples of commodities that most brokers offer trading in are gold, silver, copper, crude oil, coffee, etc.
Binary options can be set up for long as a month, a quarter or a year, but the most common time frame is what’s called short term. These time frames are as follows:
- 30 seconds
- 60 seconds
- 30 minutes
- 1 hour
- The stock market’s closing of the day
The providers of binary options trading are called brokers or binary options brokers. They offer a trading platform, and the platform is available on desktop, tablet and mobile. The brokers we write about here are all licensed and approved for trading financial instruments in the EU. This means that you can trade on the licensed platforms without having to worry about being involved with scam brokers. Remember that trading in binary options involves a large risk and is not suitable for all investors.
The good thing with these brokers is that all of them have a great variety of educational materials. You can find webinars, YouTube videos, e-books and much more. Many also offer a demo account. That is exactly what it sounds like, a demo account where you get the opportunity to try out the platform without risk. You trade in virtual currency and cannot lose anything. A perfect way for beginners to learn more and to find their feet before it’s time to start investing for real. Just remember that with most brokers, you must make a deposit of between €100 and €250 before you can open your demo account.
Pros and cons surrounding binary options
The great advantage of binary options is that you’re not in need of a large initial capital. You can open an account with as little as €100 and start investing within minutes. In each trade you know exactly how much you will be able to win or lose, you cannot lose more than you invested. Brokers have training centres where they provide great information for beginners as well as daily analysis and news for those who have managed to get a little further into the game.
Because it’s all or nothing, the biggest downside is that you lose your entire invested amount if you fail in a trade prediction. It is also important to remember that binary options have been a previously unregulated market and to never use a broker who is not licensed, even if they’re advertising the moon and stars.