Common Questions Regarding Binary Options Trading
Binary Options trading is advertised as an easy way to make money, requiring no expertise and no previous experience in anything trading-related. It basically comes off as this get rich quick scheme largely overlooked by the masses thus far, and it’s definitely not that. The best way to understand what binary option trading really is about, is to run a brief analysis of the questions most frequently asked by beginner traders. Let’s start with the very beginning: what exactly is a binary option?
A binary option is basically a contract with fixed payout and loss percentages. It also features only two possible outcomes: the contract either expires in the money or outside of it (hence its name and appealing simplicity). The payout and loss percentages vary from one broker to another, but they generally tend to run the 70%-85% scale as far as profits are concerned and the 90%-100% scale losses-wise. Indeed, there are brokers out there who will give a small percentage of the investment back to losing traders.
The great thing about binary options trading (besides its simplicity of course) is the fact that it works with a wide range of underlying assets, which brings us to the next FAQ: what exactly is an underlying asset?
The underlying asset is what the binary options contract is made on. One can trade binary options on currency pairs, on stocks, on commodities and on market indices. Basically, whatever stirs in the world of trading can be used as a base for binary options.
Not all brokers offer binary options for all the available underlying assets, but they should and if your broker doesn’t support Forex binaries for instance, you’re probably best off moving your business elsewhere.
As said above, binary options feature only two possible outcomes, therefore, there are only two possible contracts one can make on them: the Put contract and the Call one.
What is a Put option? The Put option is a contract made in the hopes of the asset price being lower at the time of expiry than at the time of the purchase.
What is a Call option? Those purchasing a Call option do so in the hopes that the asset price will go up, therefore it will be higher at the time of expiry than at the time of purchase.
What is the investment in the case of binary options trading? The investment is the amount of money the trader effectively “wagers” on his Put or Call option. Although generally speaking, the trader is free to choose the amount of money he’s willing to invest, most brokers feature a set minimum in this respect, a minimum which is pretty high for someone looking to small-ball a little recreationally.
What’s “in the money” and what does it mean when the contract expires outside the money?
When the trade expires in the money, it means the trader wins and takes his profits. If a trader places a Call option on EUR/USD at 1.308 and upon expiry of his trade the asset price is 1.310, he takes a profit of about 70-80% of his initial investment. His contract ends up “in the money”. If the asset price at the time of expiry is 1.306, he ends up outside the money and loses 90-100% of his investment.
What is the time of expiration for the binary trade? Binary contracts expire after a set amount of time, and the time of expiry is indeed the most important element of the trade because the asset prices at the time of purchase and expiry are always compared to find out the result of the trade. Some brokers offer pre-determined expiry times, while others allow their traders to set expiry manually.