Binary Options trading is one of the simplest types of financial markets trading. It does not involve much compared to other genres like stokes, CFD, Cryptos and Forex.
With binary options, the trader can deal with any type of financial asset. The assets that a trader can trade in Binary Options trading can be currency pairs (can fiat currency to fiat currency pairs and fiat currency to crypto currency pairs), stocks, CFDs or even cryptocurrencies. It therefore calls on the trader to have a general view of different markets so as to be able to predict the price movements. However, you can narrow down to the specific asset that you want to trade and do a research on it alone, instead of struggling with assets that you won’t trade.
Binary Options trading can be related to betting. The trader bets on the prices of a certain financial market, whether it will rise and fall and enters into a contract also referred to as an option. These Option/contract normally has a stated expiry time, and the payoff. The contract may also have some other conditions which should happen or not happen before the expiry on at the expiry of the contract (we will look at these when looking at the different contract/option types).
Basic Terms in Binary Options Trading
- Expiry time
Expiry time is the time after which the contract expires. While the payoff is the amount of profit the trader gets if the contracts closes in his/her favor.
The expiry times are categorized into three, depending on the duration the contract stays open. There are short expiries, medium/average expiries and long expiries.
The short expiries take place after a period of between 1 to 5 minutes. They are good for highly volatile markets. The Medium expiries expires after a period of 5 minutes to 2 hours. These ones are good for intraday traders. The Long expiries expire after a period of 2 to 24 hours. These are perfect for long term investors/traders. Also, the long expiries are best for stock options.
- A call
In binary options, you can place two types of orders depending on the direction of the market trend. If the market trend is bullish, then you buy a call option. It gives the trader the right to buy the underlying financial asset.
In short, so as to get a payoff in a call, the market prices have to rise from the point at which you entered the contract/option.
- A put
When the market is in a bearish trend, then you sell a put. This gives the trader the right to sell the underlying financial asset.
To get a payoff from a put option/contract, the market prices have to drop from where you placed your option/contract.
The payoff is usually a percentage of the amount of money that you invest in the single option or contract.
For example, you can get a broker offering a payoff of 80%. This means that when your contract expires in the direction that you had predicted, then you get 80% of your invested funds in the contract as profit. If you had invested $100 in the contract, then you get 8% of 100 which is $80 as the profit on top of your initial investment of $100.
For some brokers, they will also provide a return percentage, which is the amount of money you will expect in case your contract expires in the opposite direct of your prediction.
For example, you may get a trader who has given a payoff/return as 90%/5%. This means that the broker offers payoffs of 90%. But in case your contract expires when not in your favor, the broker will return only 5% of your invested funds.
For example, if you invested $50 and you had placed a call. Then the market prices drop instead of rising till the expiry time is hit, then you are not entitled for a payoff and the $50 you had invested belongs to the broker now. But if the broker had stated that they give returns of 5%, you will end up getting only $2.5.
However, not many brokers do this. Most brokers tend to go away with all your invested amount if the option is not in your favor.
- Strike price
This is the price at which the trader can exercise his/her derivative. In case of a call option the derivative is buying/purchasing. On the other hand, if it is a put option, then the derivative is selling the asset.
In short, with the strike price, the trader can exercise the derivative once the strike price is hit even if the option hasn’t expired.
For example, if a trader enters a call option of an asset at a current market price of $1 and the strike price is set at $30, once the market price hits $30, then the trader can execute the trade and get his or her payoff.
- In-the money
This is when the market price is above the strike price in case of a call option and bellow the strike price in a put option.
For example, if the strike price is $50 and it is a put option, then the option is in the money when the prices get below the $50.
This is when the market prices have not reached the strike prices and if the trader closes the order at that point he/she makes losses.
Binary Option trading tools
When trading binary options, you will need to predict the market movements very carefully since wrong prediction leads to losses. Analyzing the financial markets is at times hard and it requires the use of extra tools to forecast the markets in a more stress free manner.
Advantages of Binary Options
Most financial markets trading are very risky. But on the contrary, binary options tend to minimize the risks involved. But this doesn’t mean it does not have risks! It has its own risks too!
One of the major advantages with binary options is that the trader gets to know what to expect after every contract. The risk-reward is capped with the payoff, returns and expiry times. The trader can therefore be able to plan his/her trading well. The trader can do rough approximation in case of either eventualities (if the contract expires in his favor or not).
Also, the rules of each contract are usually very well laid out in each option type that the trader chooses. So there are no much unknowns actually, the only unknown is how the markets will behave before the contract expires and the trader can use technical indicators to help in analyzing and predicting the market movements.