Binary options are a relatively new trading alternative. They give you an additional investment choice in an uncertain economy.
There are many ways to trade the markets: stocks, options, commodities, futures, Forex, and more. Recently added to the mix are binary options. Binary options are a relatively simple investment because there are only two possible outcomes. This simplicity makes them an attractive investment vehicle to many new traders.
Binary Options are Different
Binary options are different than most other types of trading. They are a new and innovative type of trading that may appeal to those looking for additional ways to make money in an uncertain economy. When buying and selling stocks, both the direction of the price movement and the magnitude needs to be considered. For example, if a trader buys 10 shares of XYZ stock at $100 and it goes to $120, then a sizable profit has been made ($200), However, if the shares of XYZ company go from $100 to $101, the profit is much smaller ($101). With the commissions added in, this profit would actually be a loss.
With binary options, also known as “all-or-nothing” options, traders only need to be concerned with the direction of the price movement. If it is believed that XYZ stock will rise, then the trader makes money if the stock goes up. It doesn’t matter if the shares go up one dollar or twenty dollars; the same amount of money will be made.
Binary options are also different than the type of options most traders are familiar with. Regular options are contracts wherein the buyer pays for the right to buy or sell an underlying asset at a determined price. A binary option is a contract wherein a buyer agrees to pay for the right to get a fixed return if the underlying asset ends up higher or lower than the strike price.
What New Traders Should Know about Binary Options:
- They are short-term; they expire hourly or daily
- Put or call options can be bought similar to regular option contracts
- The payout is fixed and not dependent on the magnitude of the price movement
- Payouts are usually fixed between 65% and 81% depending on the underlying asset
- Binary options were designed to be simpler and easier for the average investor to understand
- Investors can start trading with as little as $100
- Many online brokers don’t charge commissions for binary options
- Most platforms allow traders to sign up and practice before investing real money
It is advisable to choose one or two stocks or indices on which to focus when using binary options. Becoming familiar with the trading patterns of a specific stock or index can help traders minimize the risk. This is especially good for those that are new to binary options. However, as a trader becomes more familiar with these options, it is advisable to choose a trading platform that offers a wide range of assets. With more choices there are more possibilities to make money in different markets. It is possible to trade binary options on stocks, currencies, commodities, Forex, and market indices.
When looking for a broker to trade binary options, do plenty of research before finding an account. Since it is a new and unregulated field, it is up to traders to be cautious and to do their due diligence before sending any money to a trading platform. Reputable sites will not charge a fee for purchasing binary options, offer at least a guaranteed 70% return on wins, and also have a small partial return on investment for loses. Two sites that are regulated are the CBOE (Chicago Board of Exchange) and the NADEX (North American Derivatives Exchange).
Binary Options are Not for Everyone
Binary options are not for everyone. On every website that trades binary options, you will see this warning, “option trading involves significant risk.” It is there because it is true; significant money can be made, but significant money can also be lost.
Trading binary options takes patience, determination, and a willingness to spend time researching stocks and the financial markets. Though there is some luck involved in trading these all-or-nothing options, good research skills, a patient attitude, and the ability to remain sane during the ups and downs of the market is more important than luck. Yes, it is possible to make money with binary options. It is possible to make it quickly. But for every potential profitable trade, there is an equal (sometimes greater) and opposite losing trade. Traders who never lose sight of the risk will increase their chances for reward.