Binary options enable people to trade stock price fluctuations or to invest money in different kinds of market assumptions. Trading these options is much different than trading any other kind of assets. One of the most important characteristics of binary options trading are capped risks and gains, which can be seen as both a good and a bad feature, depending on the situation and the trader’s goals.
Binary options are based on different prices and market assumptions. Each option involves a ‘Yes’ or ‘No’ claim. If the claim turns on to be right (‘Yes’), the owner of the option receives a full (capped) value of the option. If it turns out that ‘No’ is the right answer, the owner loses all of his money. Here’s one example of a binary option’s assumption:
Will the Price of Platinum be Above $830, at 12:00 am Today?
If it turns out that the price of platinum reaches $835 today at 12:00 am, the owner of this binary option will receive $100. If it’s less than $830, he/she loses all invested funds.
Capped Risk and Gain
The price of each binary option can go from $1 to $99 and the maximum gain a trader can receive with a winning binary option is $100. This can be viewed as both an advantage and a disadvantage. Binary option prices directly depend on the possibility of a positive outcome, so binary options made on assumptions about situations that are more likely to happened cost more than the ones with a lower possibility for a positive outcome.
Binary options are time framed. They can expire in a few months or in 30 minutes. The closer the deadline is, the binary options’ outcome becomes more evident, which means its price gradually increases in time.
Benefits and Disadvantages of Binary Options
Capped risk can be seen as the major benefit of binary options. Their owners can lose no more than $100 on each option. They are also cheap, so investors can base their portfolio on hundreds of different assumptions. In stock trading terms, this is similar to running a diversified portfolio made out of many different assets.
On the other hand, the low price and low gain can also be seen as a disadvantage. To earn significant funds, traders need to purchase many different binary options, which means that their gain depends on many different assumptions.
Where to Buy Binary Options
Binary options are usually not sold on exchange markets. They can be bought directly (over-the-counter) from brokerage firms. There are many online brokerages that enable traders to pay their binary options with cards and online paying systems. They also transfer all gain to the trader’s online account, from which traders can collect it through bank or PayPal transfers.
Over the counter binary option sales were almost exclusive, until in 2008, the Chicago Board Options Exchange decided to add binary options to their offer. Nadex is another binary option’s exchange, which is regulated by the Commodities Futures Trading Commission. Options bought on the market traditionally offer more protection and security than the ones bough over the counter.
Foreign brokerage firms are not allowed to sell binary options to US citizens, because to do that, they need to be registered at SEC or some other government bodies, such as the CFTC.
More Information on Binary Options
There are many different blogs, like 24Option, that offer real time information about the binary options market. Traders who want to learn more about binary options trade, should read a few more elaborate articles on Investopedia, which offer complex explanations on different terms used in binary option trading.
Binary options are perfect for rookie traders. With trading these options, beginners will learn how the market functions without a concern that they are going to lose all of their money, because of the binary options’ capped price. On the other hand, they also can’t expect to get rich and earn millions without adding some other assets to their portfolio.