What are binary options?
To understand binary options and their simplicity compared to other financial instruments, you need to brush up firstly the meaning of the term option.
What is an Option?
With the term option is usually indicated the possibility of choosing between two or more solutions, or the right of preference and priority in the purchase of something.
In finance, the option is a derivative financial instrument that gives to the holder the right (but not the obligation) to buy or sell the security on which the option was issued.
In short, the option is a contract that gives a right to its owner, realized in the faculty to choose whether or not to exercise that right. The faculty to choose distinguishes the option from the other financial instruments.
In this post, just remember that the option is a contract between a buyer and a seller. Upon expiry, the buyer has the right to choose for a given price established in origin (the exercise price or strike price), if to buy (in the case of call options) or to sell (in the case of put options), a certain asset (called underlying), such as equities, commodities, currencies, etc. etc.. To ensure this right, while issuing, the purchaser of the option must pay to the seller a sum of money (premium).
To learn more, we invite you to read the article: What are the Options?
The underlying of an option can be a stock, an exchange rate, index or commodity such as gold, silver, oil, etc. etc..
The Binary Options
Binary option is a financial instrument, a type of option that simplifies the life of the trader for a series of reasons:
1. The profit is established in a fixed amount, so in contrast to the traditional options, the trader is always aware, since the purchase of the option, of its potential profit or possible loss.
2. Simplified choices for traders who must be limited to forecast the future performance of the markets on which they wish to invest on the basis of only two possible scenarios, from here its name “binary”
Binary options therefore are investment instruments suitable for non professional traders, in fact they are simply asked to make predictions about the possible performance of an asset (eg a stock, an exchange rate, an index, a commodity ) on the basis of only two alternative scenarios.
Depending on the type of binary option, these are the possible scenarios:
High – low
Touch – No touch
In – Out
In the first case it is called options High/Low, in the second One Touch options or Touch/No touch, in the third case Range Options or In/Out.
In any case, irrespective of the type of option, each operation of investment will always consist in trying to correctly predict the performance of the asset on the basis of only two possible ways.
The bottom part shows the three types of Binary Options:
1. High/low Options – options where the trader must predict if the initial purchase price of the asset will be higher or lower than the price that the same will take on the expiry.
2. One touch Options (You have to predict if the initial purchase price of the asset will exceed or not a certain price level at a certain time)
3. Range (You have to predict if the initial purchase price of the asset will stay in or come out a specified price at a specified time limit)
As you can see, in all three types of options, the investment always consists in deciding if the title on which the option is based, will turn in one direction or in the opposite direction (increases or decreases as price, exceeds or not a threshold price, remains or not within a range).
If you want to invest, you can simply choose one of the many accredited online brokers to trade binary options, open an account (many of these brokers allow you to open a demo account with play money to practice trading, or for real money with only $100), choose a preferred asset, such as an stock, an index, a currency pair or raw materials, and then choose whether to invest in High or Low for High-Low options, Touch or No touch for the One touch options, In or Out for Range options.
In some brokers selection buttons have different terms as Up/Down or Call/Put instead of High/Low, but this doesn’t change the logic operation.
Binary options appeared already in the 70’s, are becoming one of the forms of overseas investment and most appreciated. The reason is certainly the great simplicity of their use, beside the possibility of earning large sums in short periods of time. To trade with binary options are not required special knowledge, although it is clear that higher the experience and the number of information in your possession, the easier it is to get good results.
Investing in binary options is particularly easy because not only to open an account with some brokers are sufficient even $100, but mainly because the minimum investment amount per transaction is normally only $10.
Let’s see an example of investment in binary options.
Suppose you want to invest on the asset of the currency pair EUR / USD (euro / dollar) currently listed 1,32555. Let us assume to have an uptrend, that we believe that the Euro will rise against the dollar, so we decide to invest in the purchase of a call.
If to the end, the price of the EUR/USD will prove to be greater than 1,32555, even one thousandth of a euro, the option will close with profit and the broker will recognize a fixed gain that usually varies (depending on the selected) between 70% and 95% of the investment. The profit percentage is clearly visible before and during the investment.
If instead at maturity the price will be lower than 1.32555, also in this case of only one thousandth of a euro, then the position is close with a loss and will lose the premium paid. In case of loss the most brokers refund part of the premium invested, from 10% to 20% (depending on the broker), reducing the loss.
Generally, investment in binary options have very short deadlines, from 15 minutes to a maximum of 24 hours. This means that, for example, you can invest on the possibility that a stock price goes up or down in a period of half an hour, an hour, or an entire day.
Some brokers allow you to trade binary options with a maturity of one week or one month.