Binary options trading is an exciting new type of investing. Instead of purchasing an asset itself, investors (i.e. traders) can speculate on the direction in which the rate of the asset will move.
What Is Binary Options Trading
When the trader has bought a certain asset as a binary option, the trader has created a contract which gives the him/her the right to buy this underlying asset at the fixed price, within the specified time frame, from the binary options trading brokers.
Whatever the binary options are called: digital options, fixed return options, exotic options, each name means the 0-1 nature of the options.
Because there are only two possible outcomes in binary options. Both of the outcomes are understood by the trader before making the purchase of an options.
A trade on the binary options trading system may look like this: A trader purchases a GOOGLE binary option for $100, with the option that at the end of the day the GOOGLE shares will be higher than they currently stand..
If the prediction is correct, then the trader’s position ended in the money and the profit will be cashed out. Profits range from 85% for standard binary options to 1250% with the GOptions Ladder Options tool. So, if the trader was right, he/she will be paid the $100 + 85% = $185 If the trader was wrong, he/she will get $0.
But there are always possibilities such as the round-up, double up, stop-loss and more safeties in binary options trading.
Binary Options Trading vs. Regular Options Trading
There are three major differences between binary options trading and regular options trading (vanilla options). The figure below will explain the differences.
These differences have several consequences:
- The short-term investments have multiple expiry times and are therefore more flexible than the regular options.
- In binary options both the amount and the expiry time are set from the start. In vanilla options the trader pays per contract and will only profit or lose the amount depending on the number of point difference between the expiry level and the strike price.
- Binary options trading means that the trader must keep the option upon expiring. Care must be taken when opening a position.However, a lot of binary options trading brokers nowadays are offering the stop-loss function to sell the option back to broker before expiring.
Binary options trading is a novel and interesting method of investing in the financial markets. Despite being more flexible than traditional (vanilla) options, planning ahead is an important part of succeeding.