What is a Binary Option?
Binary options are exciting, relatively new investment vehicles designed primarily for people with small investment portfolios. В The investments are in four asset categories that small investors have traditionally been unable to invest in because of the high initial investment required. В These are indices, currencies, commodities, and stocks. Anyone who has ever thought of trading in the first three asset classes knows how much initial cash is needed. Trading in stocks has always been available to small investors but some stocks are priced so high that small investors never invested in them until now. For example, Google is trading close to $725+/- for one share but with binary options you can invest in Google for as little as $10.
Binary options offer a fixed return, as a percentage of your investment, if at the end of the option period your trade is in the money meaning that you traded correctly. For example, if you want to purchase a binary option for stock ABC when the stock was trading on the stock market for $25, you can decide to buy an option for the stock to rise in value or for the stock to decrease in value. Whichever option you decide to buy, if your trade was successful you are in the money .
The History of Binary Options
Before 2008 binary options were available as an exotic investment to large-portfolio investors. They used the options as a hedge against other investments. В Smaller investors had little or no access to binary options; most were unaware that such an instrument even existed. В In 2008 some indices began listing binary options and since 2010 there has been fast growth in the number of online brokers who specialize in facilitating trade in binary options.
How Binary Options are Traded
As stated above, anyone can purchase a binary option through a broker. В The brokers try to make it very easy for you to trade binary options. They have easy-to-read interfaces giving the current values of all the assets they offer options in. There are many assets offered but no one broker offers options in every asset.
Since there are four categories of assets, the brokers conveniently have separate links for each asset class.
When you access an asset class, you see the options available, the assets offered, and the expiration of the option. You also see where you can choose either of the three basic types of binary options.
Most binary options brokers pay out between 65% and 81% for a successful trade. So, if you bought an option for $10 and you were in the money you would receive from the broker between $16.50 and $18.10. This is your original investment plus the percentage payout. If your option finished out of the money the broker keeps your investment. Due to increased competition, many brokers are returning up to 15% to traders who finish out of the money.
In binary options trading it doesn't matter if you are a tiny bit in the money or a great deal in the money; the payout is fixed beforehand.
The underlying asset is also fixed beforehand as is the option period. Some brokers offer option periods of as little as 5 minutes. В However, most offer a minimum period of 15 minutes. В Beyond the minimum are day, week, month etc. This makes binary options trading extremely flexible.
Advantages of Trading in Binary Options
Binary options offer a large percentage return on investment. В The percentage loss can also be high as a percentage of investment but, since the investment can be as low as $10, the downside risk is relatively small.
The basics of binary options are simple to learn. As such, they make formerly exotic investments accessible to the average investor. В It is true, of course, that the same asset classes that are offered as binary options are traded daily in multi-million dollar contracts. В The depth of analysis the pros make when investing large sums of money is difficult to learn and extremely difficult to master. В In the past, small investors were completely shut out of these markets so few small investors took the time to learn technical or fundamental analysis. В Now, small investors can enter these markets at relatively low risk and learn on the job .
Binary options are a strategic way to hedge other investments. В The short option periods enable you to make a quick trade to offset losses you may have incurred on other investments.
When you become more adept at trading binary options, you will be able to make market volatility work for you. В Markets react to many inputs. В Some of these inputs can effect almost instantaneous movements in the markets. В You can take advantage of these quick movements with the same low risk as mentioned above.
Basic Strategy
There are four asset classes available to binary options traders. В They are indices, currencies, commodities and stocks.
You will need to get an economic calendar. В This is readily available online. В It tells all of the regular economic announcements that will be made and when. Governments regularly report much economic data as do corporations. On given dates, when specific reports will be made, you can be poised to take advantage of whatever the economic news is.
You should take the time to learn the basics of both fundamental and technical analysis. Fundamental analysis is often called common-sense analysis but it is actually much more. You need to anticipate the effects of events. For example, weather events can have a big impact on commodity prices perhaps months after the event.
Technical analysis involves learning to read charts. В There are many tutorials available online for the serious student.
The Bottom Line
The accessibility of binary options for the average investor is truly new. В It dates from 2008 and the biggest growth in this investment method has taken place only since 2010. This accessibility is the main advantage of binary options for most traders.
Growth is now rapid as more and more small investors are discovering binary options.
Whenever you embark on a new form of investing your money, you need to do due diligence. В This means doing some research before investing. В You can follow the markets and assets without investing. В All brokers try to make following assets and markets easy on their sites.
- Posted by Denise Marie