What are binary options?
Binary Options are a type of option in which the payoff is structured to be either a fixed amount of compensation if the option expires in the money, or nothing at all if the option expires out of the money. These types of options are different from plain vanilla options and are also sometimes referred to as all-or-nothing options or digital options .
The truth about binary options
Binary Options have become very popular and attract a lot of novice traders, who find easier to trade binary options than doing actual trading, because position management is out of the equation. Most of them feel they have an edge because they can read technical charts, but ignore that short-time price movements are completely random and have nothing to do with technical analysis.
Binary Options have an expiration time, and therefore cap your profits in two dimensions: price and time. The odds of the future price being above the current price in a fixed period of time is always a 50% chance, and thus trading binary options is actually gambling.
Of course, not all usage of Binary Options should be considered gambling. Binary Options can be used as insurance to hedge actual positions in other assets, like gold, silver or stocks, for example. But make no mistake, trading binary options without an underlying trading strategy is gambling.
The mathematical truth is that, using fixed 50-50 wagers, the broker has an edge and you must be right 55% of the time in order for your bet to have a neutral expected value in the long run.
No one, no matter how knowledgeable, can consistently predict what a stock or commodity will do within a short time frame. Will Apple shares go up or down in the next 10 minutes? Unless there has just been some major announcement from the company, there is no way to even guess at that.
The good news!
The good news is that the binary options market allows you to find trades with positive expected value, because not all bets have the same cost nor have the same payoff.
Would you bet 25 and get payed 75 for a succesful coin flip? You definitely should, because your payoff exceeds the odds of the event and you would make money in the long run. This can also be achieved in the binary options market, all you need is a little patience.
For example, if the market sentiment is very bullish you can find very cheap put options right after the current bar has opened. It is not uncommon to see put options priced at 35 or 40 right after bar opening during an uptrend. This is wonderful, because you are able to bet in a 50/50 event with a 35/65 or 40/60 payoff!
Likewise, it is not uncommon to find call options priced at 35-40 if the market sentiment is bearish. Furthermore, there is a reasonable time window after the bar has opened during which you can still place the bet with the same odds of being right: 50%.
Actual trading is more profitable than binary options trading, but needs more knowledge because the trader has to implement the exit strategy. If you are a novice trader, I recommend you to study and learn to trade. Start here!
How to trade
Trading with the Pz Binary Options indicator is a piece of cake. The indicator analyzes price action patterns and displays crucial information on the top-right corner of the chart at bar closing.
How much should you pay for a call option
How much should you pay for a put option
Can the trade still be placed?
Take a look at some examples below: