Binary Options

What are binary options? What this boils down to is a contract that is going to pay the person doing the trading an amount, already determined, when certain conditions or price movements have been fulfilled. This depends on the official text at the end of the contract which will specify either ‘out of money’ or ‘in the money’ when it expires. Should the wording at the end of the contract be ‘out of money’, the person doing the trading will not receive anything. The trader’s contract ending with ‘in the money’ however will get the predetermined, fixed amount.

Types of binary options

  • Asset or nothing – If the aforementioned contract has the words ‘in the money’ at the end, the trader will be paid the worth of the underlying security.
  • Cash or nothing – The amount to be paid is a predetermined amount of cash should the final wording on the contract be ‘in the money’. Since, in essence, there are only two possible outcomes, the term ‘binary’ is meant to reflect that. The term ‘digital options’ is most often seen in the interest rate market and forex trading, but essentially means the same thing as binary options. These are quickly becoming one of the most popular trading products due to their simplicity and offering of a structured risk and reward ratio along with fixed odd returns. Currencies, indices, stocks and commodities are available asset varieties for binary contracts. The offer of hedging features along with a short trading duration with high payouts is what makes binary options so attractive to today’s traders.

Advantages of binary options
Their hedging benefits as they applied to a person’s portfolio allow the person doing the trading to minimize their losses. Binary options are easy to comprehend and to trade because the trader simply needs to anticipate in which direction an underlying securities price movement will go. Binary options are also attractive due to their potential usage by any time frame; they are available on a 24/7 basis. Possibly best of all, payouts for these are fixed and predetermined; there’s no mystery that applies to the total of a traders actual gains or losses. Should the trade ending in ‘in the money’ rise, even by a singular tick, the payout is completed.

In essence, the person doing the trade simply has to figure out what the direction of the specific asset they’re dealing with is going to be. If it moves, even minimally, in that direction upon which they predicted, and their contract ends in ‘in the money’, they make money. Should they be mistaken in their prediction, their contract ends in ‘out of money’. This is the reason binary options are sometimes referred to as ‘all or nothing’ options. The trader receives the full agreed upon amount no matter how great or small the direction of movement that they predicted ends up being.

Trading with these options requires a good sense of whether or not a specific trade will go in your favor.  You must be sure to get out of your position in a timely manner so as to minimize your losses. Should you have an inkling that this trade is not going to end up doing you any favors, you would best be served to move quickly and exit the trade. A sixth sense or hunch would be a binary options trader’s best asset.

A brief glossary of terms
The asset that is being traded in binary options is referred to as ‘the security’. This can be a number of things including but not limited to; indices, commodities, foreign currencies and company stocks. The time at which your security achieves its full maturity, or that date at which time the deal is over, is referred to as ‘the expiration date’. The direction in which your security moves; either in an upward movement (referred to as ‘the call option’) or a downward movement (referred to as ‘the put options’) is referred to by the all encompassing term of ‘trend of the movement’. And once again, the reasons that binary options are so popular right now with traders are due to its qualities of flexibility, controlled risk, accessibility, profitability and their exceptional characteristic of simplicity.

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