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Binary Options: What are they?

The financial instrument known as binary options have been around for a number of years but were basically inaccessible to beginner or even intermediate trader until very recently. The basic idea of these binary options is that they are meant to simplify the whole process of trading for beginners and advanced traders alike.

What are binary options

What are binary options?

With the advent of the internet, binary options have become a real choice for retail traders. But exactly are these binary options?

The way they work is really easy. Either you are right (and earn a fixed % of your investment) or you are wrong and as such you lose your investment. Obviously, every investment is summed up by being right or wrong. The difference here is that you need to be right or wrong within a predefined amount of time, otherwise know as the “expiry. So a binary option is defined by time and direction. Choosing to trade a binary option means that you have an opinion on the direction of the market and want to make money on this opinion. So if for example your analysis of a market like the EUR/USD or even Apple (APPL) stock leaves you of the belief that an increase is on the way, you would choose an Above or Call option. Yes, Call and Put are terms that come from the options market and quite simply refer to the direction of your trade whereby Call equates to an increase and Put equates to a decrease in price.

Every trade in the binary options market are predefined with a fixed payout. So if you choose to make that Above option on the EUR/USD, you will see a payout % in the amount of 70-90% (depending on your broker). So if you decide to stake $100 on a trade, you stand to earn 70-90% in profit if at expiry your option trade is correct.

So let’s go over the way to trade in 5 easy steps:

  1. Choose a market to trade (forex, commodities, stock indices and even individual stocks are available at all binary options brokers)
  2. Choose Direction – now you need to think whether the market is going up or down. You can see the payout % if you are correct at this point
  3. Choose expiry – do you think the market will remain above the strike or below the strike in the 1 minute, 5 minutes, or by the end-of-day ?
  4. Choose Investment – Now choose how much you are willing to risk if you are wrong. The investment size multiplied by the payout % equates to your profit.
  5. Open Your Trade – Go make some money

The great thing about trading options is the your risk and reward are known in advance. You don’t need to worry about setting a stop loss or other hidden fees or issues. It’s an easy and straight forward means of investment and is now one of the most popular trading vehicles in the world. 

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