What is Binary / Digital Options ? What is Binary Options Trading ?
Originally though, it was only large institutions and the affluent wealthy has the access of these earlier. However, 2008 saw the US Securities and Exchange Commission open the floodgates by allowing binary options to be traded through an exchange. The internet and technology have since given the whole world access to these ‘digital’ options. As it stands, with low barriers to entry for savvy day traders and a simple to understand preposition, the demand for these digital trades will only increase.
The two main types of binary options are the cash-or-nothing binary option and the asset-or-nothing binary option. The former pays some fixed amount of cash if the option expires in-the-money while the latter pays the value of the underlying security. They are also called all-or-nothing options, digital options (more common in forex/interest rate markets), and fixed return options (FROs) (on the American Stock Exchange)
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Why and How to trade Binary Options ?
According to Abe Cofnas is a thought leader and analyst in the financial industry.
“The binary option is called binary because it fits the condition of being either right or wrong-all or nothing.”
Binary options are a derivative that can be traded on any instrument or market. They appeal because they are straightforward. They are known for their simplicity and all-or-nothing nature. You know precisely how much you could win, or lose before you make the trade. No complex mathematics or calculator is required. This is why they are also known as ‘all or nothing’ trades. Moreover, a few reasons are behind to give this trading type name binary option. Options are derivative instruments. It can be traded as forex pairs, cryptos, stocks, indices, commodities, etc.
A binary option is a fast and extremely simple financial instrument which allows investors to speculate on whether the price of an asset will go up or down in the future, for example the stock price of Google, Tesla, Amazon, the price of Bitcoin, Ethereum, the GBP/USD exchange rate, or the price of Silver or Gold. The exotic option allows a trader to speculate on the price movements of various instruments. You rather predict whether the price will increase above, or decrease below the strike price or purchase rate. The strike price is the price, at which traders trade underlying assets. Market price must increase or decrease, by the time the trade expires. To trade binary option, you don’t need to purchase an underlying asset.
The expiry period for binary options is very diverse. The time frame starts from 30 seconds and lasts up to a year. After prediction the price, you will select the call or put option, depending on the asset price movement. If you guess accurately, you win a payout. But the wrong prediction will give you nothing. It is required to mention that the payout rate differs from asset to asset and broker to broker. it is a lucrative trading type because of it’s quick and high return percentage. But, according to the research, binary traders should pay close attention to the rules of trading before diving with real money.
Exchange traded binaries are also now available, meaning traders are not trading against the broker. If you are completely new to binary options then first of all you should open a demo account with a great brokers, to try out their platform and see what it’s like to trade before you deposit real money. Pick one from the recommended brokers list, where only brokers that have shown themselves to be trustworthy are included
What are the Most Commonly used Terms in Binary Options Trading:
- Binary – The term ‘binary’ is used because there are two possible outcomes.
- Call Option – A trader chooses a call option when he predicts the price of the underlying asset will increase before the expiration period.
- Put Option – When a trader predicts the asset price will decrease before the expiration period, he chooses a put option.
- Strike Price – The strike price at which the put or call option can be exercised. It is also referred to as purchase price since it is the price at which you purchase the option.
- Expiry Date – The time when the binary options asset expires.
- In the Money – When you accurately make a prediction and win a payout, then you are ‘in the money’.
- Out the Money – If you lose a binary options trade, it is referred to as “out the Money”.
- At the Money – At the end of the expiry period, if the strike price matches that of the market price, is referred to as “At the Money”. In this case, you don’t win or lose anything, and your initial investment is returned to you.
- Rate Of Profit – This term represents the percentage of money that you will get after winning trade.
What are the Binary Options Trading Types ?
There are a number of different option types to choose from. The most popular types are listed in the brief glossary below.
- Up/Down (High/Low) – The most simple, common and prevalent binary option. This is all By accurately predicting if the market price will be less or more than the strike price at the end of the expiry period will reward you a payout. The trader buys a call option if he thinks the price of the asset will increase from the current market value. If he thinks the price of the underlying asset will drop compared to the current market price, then he will open a put option.
- In/Out (Range or Boundary) – This option sets a “high” figure and “low” figure. The upper and lower limits of boundary or range are determined by the broker. Furthermore, the trader selects the preferred time duration and asset. You are then making a determination as to whether the price will finish within or outside of these boundaries. In this form of binary trading, traders have to predict whether the price of the asset they have chosen will stay within a given price boundary or stay out of it. Like high/low if the trader accurately predicts the outcome, one will get a payout. If he loses, he gains nothing and also loses his initial payment.
- Touch/No Touch – Touch binary options are also known as one-touch binary options. It is the exact opposite of no-touch binary options trading. In one-touch binary options, the market price of the underlying asset much reaches the strike price at least once before the expiry. Levels will be set that are either higher or lower than the current price. The trader has to predict whether the actual price will ‘touch’ those levels at any point between the time of the trade an expiry. Payout will come as soon as the touch takes place. In no-touch binary options, the trader selects a strike price that is above or below the current market price.
After selecting the expiration time, he places the trade. To secure a payoff, the market price of the underlying asset should not coincide with or exceed the strike price, before expiry. Here, variable payouts come into play. The payout depends on the distance between the strike price, market price, and the expiry period. The further market price is away from the strike price, higher the payout. Longer the expiration period, lower the payout percentage. The closer the market price is to the strike price, the higher is the payout. Another area where no-touch options differ from high/low is the payout percentage. Payouts for high/low rarely exceed 95%.
Please Note: With a touch option, that the trade can close before the expiry time – if the price level is touched before the option expires, then the “Touch” option will payout immediately, regardless of whether the price moves away from the touch level afterwards. But in the case of no-touch, traders can enjoy a payout of 200% or higher. In some cases, it exceeds even 500%.
- Ladder – These are commonly referred to as ‘call’ and ‘put’ by most brokers. Like one-touch options, the payout for ladder options exceeds 100%. Each ladder is a different price point, which requires price movement from the current market price.
These options behave like a normal Up/Down trade, but rather than using the current strike price, the ladder will have preset price levels (‘laddered’ progressively up or down). These normally demand a substantial price move. The flip side of this is returns will frequently exceed 100%. Although it is worth noting, both sides of a trade are not always available. There is an upper limit and a lower, in boundary binary options. Also, there are multiple price limits on ladder options. These can often be some way from the current strike price. As these options generally need a significant price move, payouts will often go beyond 100% – but both sides of the trade may not be available. The exact number of limits depends on the broker and the underlying asset that you are trading. Each limit has a different payout percentage. For each price limit, there is an ‘above’, or ‘below’ trade option. Greater the price movement, the higher the payout percentage.
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