A lot of people are trading binary options these days. It is a very popular financial instrument and its popularity is rising among personal and institutional investors. Since 2008 binary options, that are often considered exotic instruments, are available for trade with numerous binary options brokers who offer them on specialized online trading platforms. These websites actually allow investors to deal with financial instruments that are simplified if compared to the binary options traded on the stock exchanges.
Binary options are also known as all or nothing options because there are only two possible outcomes of the trade – you either win a predetermined payout or lose your initial investments. There are sometimes exceptions to this rule because some binary options brokers offer their clients the chance to return a small percentage of their money in case the deal is not successful. This is the so called return loss percentage and it is usually between 0% – 15% depending on the asset and the broker’s policy. Another rare exception appears in cases when the asset price at expiry is equal to the strike price. The term used in this situation is at-the-money and the whole initial investment is returned to the account of the trader.
There are three basic components of the binary option and these are the underlying asset, the expiry time and the price direction. Let’s give you an example to explain their meaning and to illustrate how they relate to each other when we trade binary options.
The first step after you have opened an account with a preferred binary options broker and deposited some money is to choose an asset. The underlying asset can be a stock, a commodity, an index or a currency pair. Every trader chooses the type of asset he or she is most familiar with.
After that they have to select an expiry time. It can be anything from 1 minute to several days from the moment you open a position on the binary options trading platform. The duration of the option is connected with the binary option type and usually the longest periods belong to the Touch binary options.
Once we have selected the asset and the expiry time we need to make a prediction about the direction of the asset price. If we believe that the market price will go above the strike price at expiry we have to choose “Up” (which equals to Call option). If we expect the price to fall we have to select “Down” (Put option). The last thing to do is to enter the amount we wish to invest and to verify the deal with a click of the button.
The profits from binary options trading are different and depend on both the broker and the binary option type that is traded. For instance most of the binary options brokers offer a payout of 65%-85% for the Call/Put binary options and from 350% to 500% for the One Touch binary options. As you can imagine this high payouts are connected with a great risk so always trade with caution and follow the rule that says not to invest more than you can afford to lose.