What are Binary Options?
Binary Options is a relatively new trading channel. Day traders are streaming to binary options because they provide an easier way of cash management as well as risk control.
Long term investors are using binary options as an inexpensive means of hedging market risk they have in other investments.
New traders are entering this market because it is simply easier than learning how to trade directly in the underlying asset’s market. For example, trading currencies or stocks is a lot of fun, but is very complicated and requires understanding many trading principles that are completely unnecessary in binary options. Binary Options simply provide an easier entry point into the financial markets.
Rather than purchasing the asset itself, investors can speculate on which direction they estimate an asset will move in. When a binary option is purchased, a contract is created which gives the investor the right to buy an underlying asset at a fixed price, within a specified time frame.
Those options are also known as “Digital Options”, “All-or-Nothing Options” or “Fixed Return Options”. Binaries have two possible outcomes, both of which are understood by the investor prior to purchasing the option.
An investor bought a CALL contract on the EURO against the DOLLAR for $100, with the opinion that at a specific time later, let’s say 15 minutes later, the EUR/USD rate will be higher than it currently trades. If he is correct, he enjoys a profit of 85% on his investment, which is $85. If he was incorrect, he will lose his $100
This means that when the contract is purchased, the investor knows that he will receive either $185 or lose his $100. These values will obviously be much greater, the larger the investment. An investment of $1,000 with a 85% Return may result in a $1,850 payout.
Please find below the 3 easy steps to follow in order to trade a Binary Option:
Advantages of Binary Options
There are many benefits to trading binary options when compared to more traditional options trading or other investment vehicles. These benefits range from the potential profits, to the ease of use. While binary option trading is not a perfect fit for everyone, most investors, from absolute beginners to seasoned veterans, find it to be an exciting, profitable way to invest.
- Simplicity
Whether the instrument will close Above or Below? Higher or Lower? Touch or not Touch? Binary options are simple to understand and straight forward to trade. The trader only needs to consider the direction of the asset price.
- Small Investment
Binary Options are also extremely accessible to investors who want to invest small amounts of money. With binary options, an investor can follow a market trend and almost double their investment, yielding enormous profits. By diversifying carefully as profits are generated, prolonged profits can be sustained and help build a buffer against potential losses.
- Calculated Risk and Reward
One of the biggest advantages of binary options trading is that the return on initial investment is fixed. From the onset, the amount of potential profit or loss is known. This means that a trader will never lose more than they expected and can calculate their risk as perfectly as possible and that there is a cap on how much can be earned or lost in a single trade. Since the rate of return is quite high, and trade times are short, in the long run the fixed rate of a binary option can be a huge advantage. The binary option will settle the contract irrespective of how much the asset price is ”In the money” at expiration. Therefore even if the contract is only successful by one tick the contract still pays out at the fixed level.
- High Return
Binary options are an excellent choice because of their high return. While most traditional stocks and options must mature over time, binary options generally yield 70% – 89% or more in as little as 60 seconds.
- Short Term Investment Option
While traditional options can take years to mature, the majority of binary options expire within one week, one day or one hour or less than an hour or even 60 seconds. This means that an investor can get returns between 170% – 189% on a single contract in one hour or less. If the strategy being used is sound, a trend in the market can continue to be used time and time again as long as it holds true, enabling the investor to double their investment every hour so long as the trend continues.
On the other hand, if an investor would like to refine their strategy and choose another option or direction to purchase, options expire in a relatively short amount of time and at OptioNet™, you can even close your option before the time of expiration to minimize your risk and still get high yields.
- Advantage in Volatile Markets
Binary options trading has an immense advantage in volatile markets, because it offers a somewhat safe way to continue investing. While traditional investments can be rocked by the volatility of the market, and huge losses can be incurred, the fixed rates of binary options mean that no matter how drastic the swings in the market, the fundamental principles remain the same.
This combination of a high fixed return, relatively transparent risk, and short contracts means that binary option trading can produce very high returns on an initial investment. Even a relatively small investment can, in a short period of time, produce massive profits.
- One Pip Only
In comparison to other types of day trading, where your profits are determined according to the delta between the price you bought the asset and the price you sell it at, binary options do not require more than one pip in order to be in-the-money. While Forex trading and other forms of online trading require that you have three pips just to start trading, binary options can close ―in the money‖ collecting the full payoff even with a minimal price change of a single tick.
- Hedging your portfolio
Binary options are often used as an effective tool to hedge existing positions. Binary options are compatible to most commonly used trading methods and strategies and offer a greater selection of short-term contracts across all markets, which enable the intra-day trader to trade more frequently.
- Exchangeability
Binary options are issued 24/7, allowing traders to trade on multiple time frames. As binaries are on a variety of global underlying assets from different exchanges, traders are now able to trade binary options 24/7 under the same binary options platform.
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