Juxtman
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What Are Binary Options?
Binary options are an all-or-nothing bet on the future price of an underlying asset. The trader receives a fixed payout if the price of an underlying asset (e.g., currency pair, stock) hits a preset level at a preset expiry date. The expiry date may range from a minute to a month, but is generally intraday (minutes to a few hours). Here are two examples of fixed-return high-low binary options:
Market price – In a simple high-low binary option trade, the trader chooses whether the expiry price will be higher or lower than the market price (the strike price). The trader buys a binary option betting the gold price will rise above the current market price of $1,300 in the next five minutes.
Set price level –The trader buys a binary option betting the price of gold will reach 1,310 in two hours. If in two hours the price of gold is above the strike price, the trader receives a payout. If it is below the strike price, the trader loses the cost of the option.
An option is the right, but not the obligation, to buy (call) or sell (put) an underlying asset at a predetermined price and date.
Bullish
If the expectation is the stock price will rise above the strike price, the trader takes a long position and buys a call option.
Bearish
If the expectation is the stock price will fall below the strike price, the trader takes a short position and buys a put option.
Why Should I Trade Binary Options?
Binary options allow you to easily place money behind your opinion on a market? Do you expect the price of gold to rise above $1,300? Will Netflix stock rise or fall after today’s earnings announcement? Will the unemployment rate report show an increase or decrease?
Let’s take the unemployment report as an example. A falling unemployment number is a bullish signal for the US market that can strengthen the USD against the EUR. If US unemployment falls, traders short the EUR/USD. If unemployment rises, traders typically go long the EUR/USD.
There are many barriers to buying an option on the bet that the EUR/USD will rise based on a higher US unemployment rate.
The price rises above the strike price – The unemployment report is negative, the USD price falls and the EUR/USD price rises. You get a payout.
The price falls below the strike price – If the currency pair falls below the strike price before the expiry time, you lose the cost of the option.
How the payout is calculated can differ among binary options providers. See the binary options broker and exchange examples below for two popular payout models.
Not all binary options trading platforms are zero-sum games in which the trader has to accept a fixed payout and expiry date. The trader can choose when to exit before the options contract expiry, thereby gaining more control over profits and losses.
Pros:
Cons:
How to Start Trading Binary Options at a Broker:
For retail traders to trade investment assets, they need to sign up with a broker who acts as an intermediary between the traders and exchanges. In the US, traders can sign up with the popular Nadex exchange and trade binary options directly with the exchange. As mentioned, the payout models vary across binary options providers. This review of the popular IQ Options broker and Nadex exchange demonstrates two different payout methods.
Binary options are an all-or-nothing bet on the future price of an underlying asset. The trader receives a fixed payout if the price of an underlying asset (e.g., currency pair, stock) hits a preset level at a preset expiry date. The expiry date may range from a minute to a month, but is generally intraday (minutes to a few hours). Here are two examples of fixed-return high-low binary options:
Market price – In a simple high-low binary option trade, the trader chooses whether the expiry price will be higher or lower than the market price (the strike price). The trader buys a binary option betting the gold price will rise above the current market price of $1,300 in the next five minutes.
Set price level –The trader buys a binary option betting the price of gold will reach 1,310 in two hours. If in two hours the price of gold is above the strike price, the trader receives a payout. If it is below the strike price, the trader loses the cost of the option.
An option is the right, but not the obligation, to buy (call) or sell (put) an underlying asset at a predetermined price and date.
Bullish
If the expectation is the stock price will rise above the strike price, the trader takes a long position and buys a call option.
Bearish
If the expectation is the stock price will fall below the strike price, the trader takes a short position and buys a put option.
Why Should I Trade Binary Options?
Binary options allow you to easily place money behind your opinion on a market? Do you expect the price of gold to rise above $1,300? Will Netflix stock rise or fall after today’s earnings announcement? Will the unemployment rate report show an increase or decrease?
Let’s take the unemployment report as an example. A falling unemployment number is a bullish signal for the US market that can strengthen the USD against the EUR. If US unemployment falls, traders short the EUR/USD. If unemployment rises, traders typically go long the EUR/USD.
There are many barriers to buying an option on the bet that the EUR/USD will rise based on a higher US unemployment rate.
- Your broker may require a higher account minimum to trade options
- The size of potential losses if the EUR/USD price falls is unknown
- The price could rise but not enough to cover the bid-ask spread after fees
- The orders of large traders with faster executions speeds will be filled first, which could result in price slippage
- The use of leverage will magnify any losses
- In the event of losses, you could receive margin calls
The price rises above the strike price – The unemployment report is negative, the USD price falls and the EUR/USD price rises. You get a payout.
The price falls below the strike price – If the currency pair falls below the strike price before the expiry time, you lose the cost of the option.
How the payout is calculated can differ among binary options providers. See the binary options broker and exchange examples below for two popular payout models.
Not all binary options trading platforms are zero-sum games in which the trader has to accept a fixed payout and expiry date. The trader can choose when to exit before the options contract expiry, thereby gaining more control over profits and losses.
Pros:
- Simple binary choice – ‘Yes’ or ‘No’
- Risk, potential loss, is predetermined by amount of trade
- Potential reward is predetermined
- Cannot lose more than what you have bet
Cons:
- High risk of loss of capital
- All-or-nothing bet
- A one pip difference from the strike price and the trade is out-of-the-money and pays out 0
- Not legal or available to retail traders in some jurisdictions
How to Start Trading Binary Options at a Broker:
For retail traders to trade investment assets, they need to sign up with a broker who acts as an intermediary between the traders and exchanges. In the US, traders can sign up with the popular Nadex exchange and trade binary options directly with the exchange. As mentioned, the payout models vary across binary options providers. This review of the popular IQ Options broker and Nadex exchange demonstrates two different payout methods.
great post, thank you for sharing this post is useful most people are trading binary options but they do not know what the meaning and actual reason of it is, thanks again it is profound.
