Binary Options are simple way of trading the price fluctuations of commodities across multiple global markets. If you are seeking to trade on binary options, you need to understand the risks and rewards associated with such an instrument. The first thing you need to understand is that binary options are different compared to traditional options. As a financial trading instrument, the payoff can either be a fixed monetary value or nothing. So, the risks are relatively high.

There are two primary types of binary options – the cash or nothing options or the asset or nothing options. These options give you specific payoffs. The cash or nothing options pay a fixed cash amount upon the expiry of the option. On the other hand, the asset or nothing options pay the underlying value of the specific asset or security. Asset or nothing options are known by various terms in various markets. All or nothing options, digital options (a common term in the forex or interest-rate markets) or fixed-return-options or FROs (widely used in American stock exchanges).

How Do Binary Options Actually Work?

Binary options come with a very simple “Y (yes) or N (no)” proposition. Suppose you are following an asset or a security, and you are speculating its price, you’ll seek to find out if it will end up being above a specific price at a specific time. When you trade on the security, you place a wager on whether it will touch this price or not. If you believe that a security’s price will go above the target price at a given time, you will call or buy the option. If you believe that it will fall below the price, you will exercise the sell or put option. In general, it is assumed that a binary options’ price is below £100.

Binary Trading Option Example

Let’s understand how binary options work with an example. Suppose you are following security A, which is trading at £590 a share, and you believe that the price will touch or cross £600 in a week’s time. Let’s suppose you want to purchase 5 A binary options at £0.30, with a multiplier of 100, then you will end up buying 5 x £0.30 x 100 = £150. This is the price at which you buy the 5 “A” shares.

If the price touches or crosses £600 before the expiry of the week in question, then each binary option is worth £100. If you choose a call-option, then you end up selling the options at £500, making a neat profit of £350. Irrespective of the actual price of the share, the binary option will still be £100. If, on the other hand, the security’s price expires at £599.99, the option will be deemed worthless.

History of Binary Options

Binary options were first traded in 2008 after the US Securities and Exchange Commission gave approval for the trading of such options. Over the past decade, trading in binary options has increased rapidly. Although binary options have been in existence since the birth of stock exchanges, it was not available to investors and high net-worth individuals over the counter. The first exchange to offer binary trading options is the Chicago Board Options Exchange, followed by the American Stock Exchange soon after.

Types of Binary Options

Binary Options are categorised into seven types, as outlined below.

• The High / Low Option
• The One Touch / No Touch Option
• The Boundary / Range Option
• The 60 Seconds / Short Term Option
• The Long Term Option
• The Ladder Option
• The Pairs Option

Let’s check each of them briefly in the next subsection.

The High / Low Option

The High / Low Option is the most basic binary option. Let’s say you’re following an asset, like a security, share, commodity or currency, or even an entire stock index, then you would ask the following question, “Will asset A trade at a price higher or lower compared to asset B at the time of expiry?”

If you believe that asset A will trade higher than asset B, you choose the High or the Call Option. On the other hand, if you believe that asset A will trade lower than asset B, then you choose the Low or the Put Option.

If, at the lapse of the period, your initial assessment regarding A trading higher than B or A trading lower than B is correct, then you win the trade. Else, you lose. Therefore, you see, with a binary option, you have the choice of opting for one or the other option, based on your initial assessment.

The One Touch / No Touch Option

This binary option goes a step further and you ask the following question. “Will asset A reach a trigger point, B at the end of period C?” To find the trigger point, you must have a chart handy with you. However, you can check out the previous performance of the asset, and make an assessment as to where it will lie on the chart at the trigger point.

Generally, the farther the trigger point from the current price, the more the payout, assuming you win. The closer the trigger point is to the current price, the lower the risk, and so, lower the payout that you receive.

If your assessment about asset A reaching the trigger point any time before the expiry of the time is correct, then you gain a profit. Otherwise, you lose your investment.

Boundary / Range Option

The third type of binary option is the boundary or range option. In this type of binary option, the assets are traded in a range, or within two boundaries, and involve trading in a channel. The ranges contain an upper limit and a lower limit, giving rise to the concept of a “channel.” These upper and lower limits are determined by what’s known as the support and resistance. You assume that the price will trade within this range, but over time, the price will go beyond the upper limit to the next range.

The biggest advantage of the range trade in binary option is that it allows you to make a profit even when the prices of the asset are relatively stable. As you are making a price due to price fluctuations within a range, you have a unique opportunity to discover the in-and-outs of binary trading options.

The 60-Second Trade or Short-Term Option

A very popular trading option that has recently emerged is the 60-Second or Short-Term Trading Option. Many brokers offer this trading option with the other standard options, like the High / Low Option or the Boundary / Range Option. This trading option functions exactly like the High / Low Option, except that the action takes place within 60-seconds.

The reason for the popularity of this option is the thrill it offers traders and customers. Within a minute, you either win or lose money, and it triggers you to try your luck every minute. Variations of this include a two-minute trading option or the three-minute trading option.

The Long-Term Option

As the name suggests, these options spread over long time periods, and many traders offer this option. What’s exciting about the Long-Term Option is that it is spread over days, weeks or months, with the expiry times varying. So, you end up following the movement of the security, during the days leading to the expiry of the time-period.

The Ladder Option

The Ladder Option is like the Boundary option, and allows you to make partial profits in stages. The term ladder is used because you encounter a higher price band every time you trade. Therefore, the prices vary within a range every time you trade, and the current range is always higher than the previous range. Hence, the term ladder. Ladder Options combine the benefits of the Range / Binary Option and the Long-Term Option so that you can benefit from the increase in prices in stages. No wonder, the Ladder Option gives you a return of more than 100% in many cases.

The Pair Option

In the case of Pair Options, you speculate on two trades at the same time and try to safeguard your investments. You can consider this equivalent to the common saying, “Don’t put all your eggs in one basket.” Suppose, you are speculating the shares of Amazon and Microsoft, and you’ve been attracted to the investors’ calls that Amazon will outperform Microsoft today, then you’d place a higher amount on Amazon, while a lesser amount on Microsoft, with the hope that Amazon will outperform and you will end up making money.

How Safe are Binary Options?

Every investment instrument carries an inherent risk, and so is the case with Binary Options. Since this is speculative in nature, you will face risks in your investments. Recall, in the case of binary options, you either make a profit or lose. That’s as simple as it is. A sound knowledge of the investment instrument will help you minimise the risks involved, and you’ll know when to call and when to put. As a sound investment instrument, binary options can get you 60% to 90% returns, based on various factors.

Trading Platforms

Binary options require you to trade on a platform, which allows you to take sound, well-informed and educated decisions. The most common platform is the binary trading software, which allows you to trade your asset. There are various features that the platform should contain, and we’ll check them out in this subsection.

Many traders have invested millions of pounds to create the most robust software for binary trading. The software allows you to trade binary options seamlessly, and with utmost efficiency and reliability.

The following factors are considered critical while choosing a trading platform.

Security. The first and foremost requirement is security of the software. The software is an online platform that captures and stores various sensitive data about you and your finances, and are, as such, an easy target for hackers. Hence, security is of paramount importance so that all your information as well as transactions are fully secure. Most trading platforms are online and offer https to secure your data.

Transparency: A transparent software allows you to take an informed decision. This is possible when what you require from the software is available to you at the click of a button or without much hassle. Additionally, all your transactions are available to you for reviewing, and any request is backed by a secure authentication code to ensure that only you authorise all transactions. These will go a long way in ensuring that the platform retains its users.

Higher Profits Vs Quicker Profits. At the end of the day, you are investing in a binary option because you want to make a profit. If a platform offers only quick profit options, you cannot play with long-term binary options, or vice-versa. On the other hand, if a platform offers you long-term benefits with short-term gains, it will be ideal for you, as you can invest in long-term instruments and short-term options.

Support and Variety: Being a software, and available online, you should be able to trade whenever you want to. 24/7 support will give traders and customers like you the confidence to get your issues sorted out whenever you hit a snag. Similarly, the tool should allow you to trade on various asset options, like shares, debentures, bonds, currencies, commodities or even a stock / share index.

The Growth of Binary Options – Demand for Digital Platforms

The market for binary options has grown by leaps and bounds after 2008, and the reasons for this is the explosive growth in the demand for digital platforms. Though the nature of financial transactions hasn’t changed, the fundamental way in which they are traded has changed significantly. All transactions happen instantly, in real-time, through the world-wide-web.

The world is more connected than before, and the amount of cross-border communication, transactions, information sharing and searches through online platforms have seen a huge surge since 2005. Large populations are using social media for their international connections, with millions of them using cross-border e-commerce solutions. Digital platforms have also resulted in job opportunities for both traditional employment as well as freelance assignments, with the emergence of a global labour market.

The resulting cross-border e-commerce and flow of information has resulted in a significant increase in the global GDP, and this will only see an increase in the next few decades.

Given this scenario, binary options will surely see huge spurts in the coming years, as people opt for trading through online platforms, and binary trading gives them the perfect tool to trade in various assets and securities from across the world.

Resources for Learning Trading in Binary Options

The best way to learn binary trading is by setting up a demo account. We will come back to this in the next section where we will describe what a demo account is and how it will be useful for you to learn binary options trading.

Seminars: You can attend various seminars and presentations by brokers who are out there in the market to teach you the nuances of binary options trading. While many of these are paid seminars, a handful of brokers even offer free training to their clients, which you can take advantage of.

E-Books: Another way to gather knowledge of binary options trading is to read as many e-books as possible. Some of the famous e-books that are available for you to read online include the following.

• Trading in Binary Options: Strategies and Tactics by Abe Cofnas and Addison Wiggin; published by Bloomberg Financial.
• Binary Options: Strategies for Directional and Volatility Trading by Alex Nekritin; published by Wiley Trading.
• Binary Betting: An Introductory Guide to Making Money with Binary Bets by John Piper, published on Amazon.com
• Videos: The web provides you numerous videos to explore on binary trading. Some of the popular online training videos include:
• Binary Options 101 – How to Trade Binary Options for Beginners, available on https://www.youtube.com/watch?v=XkBWMVtk3wc
• The 60-Second Strategy: Learn How to Trade Binary Options for a Profit, available on https://www.youtube.com/watch?v=pDVKTdPNYKk
• Call Options and Put Options Explained in 8 minutes (How to Trade Options for Beginners), available on https://www.youtube.com/watch?v=EfmTWu2yn5Q.

Demo Account and How to Choose One

One of the best ways to learn binary options trading is by opening a demo account. A demo account is a risk-free no-obligation way of testing whether a platform is suitable for you or not. The demo account will also help you in verifying if the features as described by the broker are true or not. Additionally, you can figure out the features and functionalities yourself by exploring them thoroughly.

Since you are not investing any money in purchasing shares or assets, you can satisfy yourself regarding whether the broker is regulated or not-regulated. Regulated brokers are reliable, as compared to a non-regulated broker. Some brokers may offer you a very swanky site, but their service may not be adequate.

Finally, you must remember that the demo account is available to you for a limited time. So, for your benefit, it is recommended that you make the best use of what is available to you. The best demo accounts are generally available for free, are exactly like the real platform, and not time-limited. So, you get to explore them thoroughly before opting for opening a permanent account with them.

Scams and How to Avoid Becoming a Prey

Like all financial instruments, binary options face the risk of fraudsters and scammers. Since binary options are easy to trade in, and generally give relatively high returns, many scammers and fraudsters found it easy to scam gullible customers with their sweet and glib talk and wild promises. “If it sounds too good to be true, then it usually is”, If you remember this, you can safeguard your investments, and ensure that you get the kind of return you’ve been dreaming of.

One way you can get scammed is when you are assigned a relationship manager. Many of them do show a very rosy picture, with many happy clients. But always take what they say with a pinch of salt, since they don’t always give you a true reflection. You can verify these managers with the broker or from any other source, and only have verified people as your relationship managers.

Finally, one way you can safeguard yourself against scammers and fraudsters is by choosing a regulated broker. Regulated brokers are always safe, since they have been trained in dealing with binary options, and understand the market very well. They have sound fundamentals regarding the way the binary options market works. While you reduce the risk of a scam, you cannot guarantee 100% safety.

It’s important for you not to trust anyone lightly. Be sceptical about anyone you deal with, and read the reviews about the broker and remember what we’ve mentioned earlier.

FAQs

So, before we conclude this guide on Binary Options, let’s check some Frequently Asked Questions about this investment tool.

What are Binary Options?

A binary option is a contract that allows you to make money on both rise and fall of a security or an asset. Binary Options are also called digital options because they are traded over a digital or online platform. In general, the profit is fixed and known at the time of making the deal.

What is a Call Option?

In a call option, the underlying premise is that the price of the asset or security will rise. If an investor expects the price to rise, then they choose the call option. If the current price of the asset is higher than the purchase price, the investor gets 70% of the profit, however small the price increase is, if the price doesn’t change, the investor gets back the entire investment made.

What is a Put Option?

In a put option, the underlying premise is that the price of the asset or security will fall. If an investor expects that the price of an asset to fall over time, they choose the put option. If the current price of the asset is lower than the purchase price, the investor gets 70% of the profit, however small the price decrease is. If the price doesn’t change, the investor gets back the entire investment made.

What is the Minimum Investment?

Most brokers have a minimum investment criterion and this starts at £25. When you sign up with a broker, you must have this amount as the minimum balance in your account, with the maximum amount being anything, to the tune of £10,000 to £20,000

How can I purchase a Binary Option?

The process for purchasing a binary option is to become a member on a broker’s site and top-up your account with the minimum investment amount. In many cases, the broker may charge a service fee, so your minimum amount should include the service fee the client charges. Once you have completed these tasks, you choose the asset or security you want to purchase, and make an educated guess on whether the price will rise or fall.

If you anticipate a rise, choose the call option, else, choose the put option. Then enter the amount to purchase the binary option. Then, set the time frame, or expiry date of the option. This varies from minute to hour, day, week or even month. Then confirm your transaction, and you’ve purchased the binary option.

How much money will I make with Binary Options?

The profit you will make depends on the accuracy of your forecast. A lot depends upon the market fundamentals, and various factors that aren’t in your control. But, in general, if you study the historical performance of the asset and take a decision based on the market’s mood and fundamentals, you can make anywhere from 65% to 70% of the fixed profit level.

What if I take a wrong decision or make a wrong forecast?

All of us are humans, and bound to make mistakes, and many times, our forecasts can go wrong. Your predictions may not match reality and in such cases, you end up losing your investment. But, there’s a catch here. Brokers don’t like their customers losing money, and so, in many cases, they partially bear the loss incurred by the customer by reimbursing a part of the investment, to the tune of 15%. So, you see, you end up making a decent profit in case your forecast turns right, but the broker saves your day by partially bearing your loss.

What is an Expiry Level?

Expiry level is the time at which the option terminates. At the completion of the timeframe, the level indicates the estimated price of the underlying asset or security.

How long should I keep the binary option open? Or for how long can I buy a binary option?

Prices of assets rise and fall at all moments. If you can track the performance of the asset or security by the minute, you can keep the option open for a minute, and then decide to sell it off. You can also keep the option open for 10 minutes, 15 minutes, an hour, an entire day, a whole week, or for a month. One thing you must ensure when you purchase a binary option is how long it will be open in the market till expiry.

Why can’t I see an underlying asset that I am interested in?

Binary options can be traded only during the trading hours. As you are aware, the world is divided into many time zones, and in each time zone, a few stock exchanges are in operation. When Hang Seng is in operation in Hong Kong, the New York Stock Exchange is closed. So, in this time zone, you can purchase all stocks listed in the Hang Seng Stock Exchange.

How can I make a correct forecast?

Correct forecasts can be made only when you understand the fundamentals that drive the market and the market mood. This requires a thorough knowledge of financial analytics, technical and fundamental analysis. Creating appropriate mathematical models, or thoroughly studying historical performances can go a long way to ensure that you understand the signals that the market gives out or the broker’s site describes in detail.