We’ve been on a roll with Binary Options posts recently. Because of the amount of new readers who have found their way here, it’s about time to do go over the basics of what we’ve learned. Let this serve as review for steady readers and those who have tried their hand at some binary options trading, as well as an introduction to people who are new to the idea.
What is binary options trading? It’s easy. The investor trades on price fluctuations, the highs and lows, of various global markets. Because you can’t see the future, there’s a lot of gamble to the exchange of binary options, but also the possibility of big yields! In this exotic option, the investor will make a wager on a market direction, either above or below what is known as a strike price. If you pick the direction correctly, you get a fixed return. Get it wrong, and you lose your investment.
To wager that the market will be above the strike price when time runs out, the investor buys a “Call”, or a “Put” if the investor thinks it will be below this mark. Most of the time, the strike price is the current level of a particular market, like the S&P 500. By purchasing Calls and Puts, the investor is wagering on the direction of growth for that market over a particular amount of time. Investors can enter or exit the exchange at any moment, with full confidence in how much money they are leaving with because their information is visible onscreen at all times. These exchanges profit from fees, not from losses suffered by investors.
So what would this look like? You set yourself up with a binary options trading platform. You have performed some market analysis, and you believe that the S&P is going to take a plunge this morning from its current position at 1750. So you buy a Put option, betting that at the expiry (let’s say 1 hour from now), the S&P will have fallen to some level below 1750. If you’re proven right, you get 70%. If you’re wrong, you’ve lost your investment. You can invest very high or low, though your broker may have minimum and maximum amounts. In the case above, let’s say you invested $1000, very sure of your analysis. You would have walked away with $1700. If the S&P had risen, you would have lost it all. If it hadn’t moved a bit, you probably would have gotten your investment back with no loss (but you’ll want to check with your broker in advance on that point).
International binary options markets and brokers tack on all kinds of different rules and structures to their exchanges. Some of them have much higher payouts (and much lower odds). These exchanges change all the time, so if you are investing in a new international exchange, make sure you understand exactly what you’re getting into. These markets are unregulated outside the US, so invest at your own discretion.
For investors knowledgeable about particular markets, binary options can be an attractive option. The timetable is extremely short, you know exactly what you stand to win or lose, and there aren’t fees like commissions associated with the exchange. Savvy binary option choices offer a higher return faster than almost any other investment option. At any point, you stand to lose more than you can gain, investment by investment, so you’ll have to choose correctly more often than you choose incorrectly, to offset losses. However, if you have a good sense for the behavior of these markets, binary options may be a great choice for you.
Take a look at our more in depth reviews of the binary options process and various exchanges. We hope that, for now, this serves as a good review or introduction to binary options.
Photo Credit: Matt Champlin