Binary Options

While binary options trading can be a very potentially lucrative investment opportunity, as with all all forms of investment they do carry risk that you need to be aware of.

1. The first and probably the single most important one for you to be aware of is one you probably already know. And that is the stock market is very volatile. If your retirement account has taken any hits lately you probably notices this.

Anything can affect the direction that it goes. With the recent downgrade of the credit rating of the USA, to whatever military conflict erupts the interconnected global village can bring havoc into any trading portfolio. Remember Murphy’s Law that whatever can go wrong will go wrong. You can name any type of negative event that can happen and the market can go haywire.

2. Binary options can not be exercised until expiry. In other words you’re getting into a trade you can’t get out of. On the other hand though with binary options your losses are limited to the investment and there are no margin calls. And some brokers will give a 15% refund on a losing trade.

3. Another risk in binary options trading is the number of decimal points involved. A vanilla option has two decimal points where a binary option can have to four. So if your trade ends up with 0.0001 away from being a winning trade you lose.

4. A fixed rate of profit. While 71% profit is a few light years better than what you’ll get with bonds these days vanilla options have the potential for triple digit profits. This does have an advantage over taking a second job though. Because if you invest $100 in a trade and you win you get $71. What part time job pays you $71 an hour.

Not trying to scare you away from getting involved with binary options trading as there is real potential for profits. It’s simply that with the right knowledge and an awareness of the risk involved you can make better informed decisions as to what you are getting involved in.

While there is clear and obvious risk in binary options trading if you choose this as an investment vehicle you are well aware of the risk that you are getting into. Other forms of investment often try to downplay the risk which can leave you in shock should something not go the way you anticipated.

Were you looking for a simple way to invest some money? You should use a digital option. It is a new, and (some would consider) unique type of investment tool. You should not let all of that scare you. A binary option is truly one of the simplest forms of investment. In the digital, and mathematical worlds, binary simply means 1 or 0. Binary options have two different results only. This can be very settling to a first time investor looking to get into investing. I understand not everyone has the ambition, or time to dwell on the long term benefits of a unique stock, or the huge amounts of detail involved in a mutual fund. The best thing about a binary option is the simple nature. I’ll explain.

When you choose to invest in digital options, you have very few decisions to make. First, pick an underlying asset. This simply means choosing a stock, commodity, currency pair, or entire index. The next decision to make is if you have the feeling that underlying asset will go up, or down over the time frame of the binary option. This can be as small as one hour, and as much as one month in usually. After you have picked an asset you should decide how much you want to invest. In most cases anywhere from $30 to $3000 is acceptable. Next, you should place your investment at one of the three major online brokers. This is free of commission! The amount you may get upon expiration is known before you place the investment! This is the beauty of binary options. We’ll say you decide to invest $100 in stock ABC. If you think it will gain value before expiration of the option, it will be a call? option. If ABC is up at expiration, you will receive a 65-81% profit. Guaranteed. If ABC is down at expiration, you will get nothing.

The other option is the put binary option. This only means you believe the underlying asset will lose value. If that happens, you will receive the 65-81% profits. If ABC is up, you will get nothing. Easy, right?

A binary option is a simplistic way to invest, with full knowledge of what will be gained, or lost. The profits (or losses) can be realized much quicker than the majority of investments. The catch is that research is still very important. To be a good binary options trader, you should have a good understanding of the underlying asset. Despite that, the simplicity is great, and makes this kind of investment available to anyone. You can invest with a small amount of cash, and the total knowledge of what can be won, and lost is something no other investment can compete with. Go on and try them out after you do your research.

The number of people who trade binary options is growing rapidly. New binary options sites are popping up everywhere and registration offers are getting more and more attractive as the competition grows. For those of you who are on the fence about getting into this trendy new form of investment, here’s why people trade binary options and why they are heading for financial world domination:

It’s good money

The truth is if you take a look around the investment market you will notice that one of the only ways to gain a 65-71% return on stock, commodity, currency or index trading is to trade binary options. Depending on the underlying asset you choose to invest in, you can make some serious earnings. Your success only depends on one result – the rate of the underlying asset at the time of expiry. Of course, brainpower is needed to some extent here. To trade binary options, you need to study the behavior of the underlying assets that interest you, but you don’t need to be a gifted analyzer or forecaster to turn this knowledge into profits. You just need to grasp the general trends and predict the direction an asset will move. If you manage to do this, you could make thousands of dollars a week.

The risk is lower

One of the major characteristics that compel people to trade options is the 15% safety net return that most platforms offer, should your option expire out-of-the-money. Whenever you buy Call or Put binary options, you are awarded the reverse option automatically for free and it protects 15% of your investment. For example, you invested $5,000 in a trade with a 70% return and it was successful upon expiration. It turned into $8,500. The opposite expiration would still leave you with a $750 refund.

You don’t need to be a financial expert

Like I said above you don’t have to be an investment guru to trade binary options. Most investment amateurs think that to get into trading you have to be a financial markets genius to get in the game. That might be case with other investment tools but not when you trade binary options. It’s all about predicting the direction of the market, and only the direction. For this, all it takes is a couple of hours of reading financial news from your favorite internet news source (probably already part of your daily routine). In addition, it is very easy to trade binary options online. With just the click of an arrow you choose a Call or Put Option and you’re done.

1 hour and you’re in the money

In fact, most investors who trade binary options will tell you that the best way to trade is to choose the 1-hour expiry time. This is the optimal choice because the shorter the time, the less chance for fluctuations. Unlike mainstream investment tools, you don’t have to wait for a month or a year to grow your investments. In 1 simple hour you could be a few thousand dollars richer.

There are bonuses

The majority of options trading sites reward members who trade binary options with them by handing out bonus cash. For example, the site will grant a member with an extra $20 for every $100 deposit he makes. Some sites have special weekend and holiday bonuses and it’s also quite common to receive a promotional email with a more personalized offer. For example, your binary options trading site may offer you a better rate for a limited time if you trade binary options on your favourite underlying asset.

Set up is absolutely free

You don’t need a broker or an advisor to trade digital options, nor do you pay any commissions. If you come across a site that asks for a registration free, navigate away fast! Nobody takes a piece of your earnings and they are yours do withdraw whenever you choose.

Any option trading tutorial would be incomplete if it didn’t mention a simplistic form of options called binary options trading. Not too many investors know about this form of investment but it is a very hot market right now for people not willing to be stuck with long holding period investments such as stocks, bonds, mutual funds, traditional option contracts and futures. You may look on the web for another option trading tutorial if you want to know about the more common form of contracts trading. This tutorial will focus only on binary options trading.

Binary contracts are, like the name implies, bi-polar. Either you choose the “up” side of the switch, or the “down” side. You might think of it similar to any two-sided choice – yes or no, true or false, heads or tails, on or off. In this case the binary switch refers to up or down movements in a stock, currency, or index.

How it works is that you, or I, or any investor with a binary options trading account picks one of the available securities to trade (not all securities are traded… only the highest volume securities are traded this way) and selects how much to invest. Once the amount to invest is selected the investor must choose which direction the security will go, up (choosing “call”) or down (choosing “put”). The trading software computes the payouts (also fixed based on the contract) and if satisfied with the contact, the investor submits the order.

The really fascinating part about this sort of transaction is that it does not matter how much the stock moves… the only thing that matters is the direction. The payout at the end of the contract is the same whether the security jumps a nickel or twenty dollars. If the binary options trading contract is for a 75% payout on an up movement of a security on a $100 investment and the stock is up even just one cent at the expiration of the option, the investor receives $175 ($100 invested plus $75 profit). Options expire typically hourly so a successful trader can execute many contracts every day.

So in summing up this binary trading tutorial:

• Contracts have fixed expiration (hourly) – and can’t be sold prior (although it is simple enough to simply make another contract with the same expiration)
• Trades require the investor to choose only how much to invest, which security, and which direction

Binary no-touch (also called a lock-out)- A binary option in which the trader only receives payout at expiry only if the binary never reached or extended beyond a predetermined price before expiry (known as the touch barrier). For example, if an option of 20.00 is traded for $222.32 as a binary no-touch option and predicted that the price at expiry will not reach or fall below the range of 17.32. The price of the option either reaches or falls below 17.32 and the trader loses all but $33.35 or the price of the option never reaches or falls below the pre-determined price of 17.32, and the trader receives his payout of $377.94.

This is a good trade for instances in which a trader predicts resistance in an option breaking above a certain price, but expects that the option will not fall below a certain price.

Binary double no-touch (also called double lock-out or range binary)- A binary in which the trader only receives payout at expiry only if the binary never reached or extended beyond either of the two predetermined barriers.

For example, if a trader buys a double no-touch option at a price of 1.43 with 1.44 as the upside barrier level and 1.23 as the downside barrier level. The option moves during the trade period between 1.28 and 1.435, making the trade “in-the-money.” The trader receives his payout.

Had the option broken either barrier, trading over 1.44 or falling below 1.23, the trade would have been out-of-the-money and the trader would not have received his payout.

Double one-touch- A binary option in which the trader receives payout at expiry if the binary reaches or extends beyond either one of the two predetermined barriers. If neither barrier is touched at the time of expiry, the trade is out-of-the-money and the trader does not receive a payout.

For example, if a trader buys a double one-touch option at a price of 5.45, with 5.49 as the upside barrier level and 5.41 as the downside barrier level and the option reaches either beyond 5.49 or below 5.41, his trade is considered in-the-money and payout is received.

This is a good trade for instances in which an economic report is due to be published and the trader believes it will affect the price of the option in one direction or another. It is especially popular in the forex market.

One-touch (also called Lock-in or Touch Digital)- A binary option in which the trader receives payout at expiry only if the binary reaches or extends beyond the predetermined barrier.

Traders use this option when they expect the price of an option to reach a certain amount, but are not sure that the option will remain at that amount. This type of option is especially popular in the commodities and forex market.

Binary options, digital options or all or nothing options are a relatively new type of investment instrument which is available for traders from mid-2008. Also known as fixed return options (ORF), have gained increasing popularity due to the relative simplicity of its operation, even for those traders with little or no previous experience in the market. These options are classified as exotic options, since although its operation is simple, the calculations behind the pricing are complex.

Besides this, binary options trading is based on a variety of underlying instruments such as currency pairs, stock indices, stocks, commodities and others. In this way the trader can covers several markets with a single financial derivative.

With this type of option the trader does not transacting directly with the underlying instruments, only speculate on the price of these, ie to predict whether it will go up or down. Therefore there are only two possible outcomes (hence the name), is that the price ends above or below the entry price after the expiry of the period of the option.

Thus, if the trader predicted that the price will go up and end of the option period in fact the case (even for 1 cent), it is said that the option ends “In The Money”, which means that operation was winning. When this occurs, the trader gets a fixed gain which depends on the underlying asset and the period of contract and can be from 70% to 85% of the amount invested. For example, if I invest $ 1000 in a binary option and the final success in my prediction and the option ends “In The Money”, my profit will be $ 700 to $ 850.

If the trader is wrong in his prediction of the market, it is said that the option is “Out The Money” and thus lose the amount invested, but depending on the broker he can recover an amount of 10% to 15%.

In most cases, binary options have a duration of 1 hour, however there are also options of 1 day, 1 week and 1 month.

Advantages of trading with binary options

• They provide a controlled risk: The percentage of potential earnings is known from the beginning as well as how much can be lost on each trade, which facilitates monetary management.
• Simplicity in operation: The operations with binary options can not be simpler, the trader must only determine if the price of an asset will rise or fall.
• Attractive performance: The potential for profit with the binary options is quite high with yields of 70% to 85%. This is compounded by the fact that profits are awarded if the price has moved only one point in our favor.
• Hedging: Binary options can be used to hedge positions in other instruments. In this way we can use them to reduce or eliminate losses from transactions with currency pairs for example.
• Contracts are issued at any time: The contracts with digital options are issued during almost all the day, which gives the trader the opportunity to trade at different times. All have an expiration date came and constantly presents new opportunities for operators.

The newest feature of binary options trading is binary options signals. For a long time in other markets have there been signals, such as in the forex market. These are referred to as forex signals. The signals that are available now in the binary options arena few, but are growing at an alarming pace. You will be surprised at just how many binary options signals providers are popping up all over the place. The question is just how good are these signals? Well, you will have to do your research into how helpful these signals can be to your binary options trading experience.

Beginners

Options trading signals are important, but if you are a beginner with digital options, then you should firstly focus on learning the key terms about options. The fact is that if you are an ambitious trader, you can start integrating options trading signals into your trading. Please take note that this should be done steadily to earn the maximum returns.

Intermediate

If you are a trader on the options trading market with some experience already, options trading signals are a must! These signals may be in their infant stage, but taking the advantage in the early stages is what makes a smart trader. Many middle of the road digital options traders are already using options signals to their benefit, and they are seeing the profits rise each trading day! You should take into account that you also need to do your research into the markets. Options Trading Signals aren’t a brain, but they are a great tool! This means that if you use options trading signals hand in hand with your own knowledge of digital options, this will eventually pay off!

Advanced

If you are an advanced or professional digital options trader, then it really is your choice if you want to integrate options signals into your trading experience. When it comes to trading binary options, some professional traders like using signals, whereas others do not. This means you need to figure out for yourself where you fit in. If you carefully do your research with digital options signals, you may well find that there are signals on the market which you can purchase, and they will make options trading simple.

The Future

It does look as if there will be a bright future for options signals. Considering that online options are young, binary signals have not reached their full potential. Also, traders themselves do not realize how much they can add to their trading experience. This is different to other types of online trading, where traders already know the potential that trading signals offer. Therefore, if you are just starting to trade binary options, there are a lot of exciting features which are waiting for you. All you have to do is to get started with a binary trading broker, and you will see what you’ve been missing. If you are interested in binary options signals, then make sure to use them while you trade options!

Binary options don’t function the same way as standard options, even if they take the identical titles for instance “calls” or “puts”. On the, their pricing and profit components are far less complicated basically because time decay is not really an issue. On the downside, they are normally very short term speculative positions based on where the underlying financial instrumnent will be in an intraday timeframe. If it is wherever you predicted, you enjoy a set payout; if it isn’t, you lose most, but not all of your investment.

The word “binary” means “two” so this class of options is appropriately named. There will only be two possible outcomes – they pay you they don’t. From time to time they can be called all-or-nothing options, digital options or fixed-return-options (in the USA).

In a manner of speaking you could think of it like betting on a horse race. The thing is, there are only two horses with this race – the first is called “up” the other “down”. In the event you pick the right one, you win; if not, you lose about 90 percent of your outlay. Binary options normally have a good return on risk percentage – often way above 50 percent and this ultimately suggests that providing you get more trades right than wrong, your bottom line will be a net gain.

Binary options can also be used for short term range trading. Rather than it being your aim for the price to be below or above a specific price level, you’re now speculating that the price of the underlying will trade within a selected range during an agreed time period. These are called “hit or miss options”. The trader picks the price range and the timeframe and the broker responds by creating a price. If the price of the underlying trades within the price range until expiration of the short timeframe specified, you’ve got a “hit” and get paid.

Binary Options Pricing

Like standard options, the pricing of binary options includes the element of implied volatility which means you’ll want to evaluate the price offered to make certain there is value in the binary call or put options you intend to purchase. The important thing is to have a strategy which includes a suitable return on risk for successful trades that is adequate to cover the likely number of losses. For instance, a minimum 70 percent profit on each successful trade and 10 percent loss on failed trades means that you will want 6 trades out of 10 correct in order to make an overall profit. If you accept less than 70 percent ROI then the mandatory number of profitable trades increases.

Binary options are never exercised so you will never be stuck with the underlying financial instruments at expiration time. The result is very straightforward – you either get paid or you don’t. They are usually European-style options since they will be only settled in cash at expiration. The payout is either cash-or-nothing or asset-or-nothing. In each case, you receive cash, which is the value of the asset.

Binary options can be traded on stock indexes, currency pairs or individual stocks.

Let’s consider an example:

Assume it’s 11am and the EUR/USD currency pair is trading at 1.3480. You believe that it’s going to close at or above 1.3500 by 2pm today. Therefore you buy 10 binary call option contracts with that strike price, at a cost of $40 per contract = $400 cost. If the EUR/USD is at or above 1.3500 come expiration time, you receive $100 for each contract. Below that you receive nothing.

The expiration time comes and you’re in luck. Your profit is $1,000 less the $400 cost of the options, ie. $600. You risked $400 and made $600 which is 150 percent return on investment. Well done!

The simplicity of binary options has made them attractive to speculative traders and their launch in July 2008 has opened up yet another way to trade options.

The majority of binary options platforms have indices from emerging markets like China, Indonesia, Malaysia, Mexico and Brazil on their list of available underlying assets. Returns on these assets vary from 60% to 71% and they expire hourly, daily, weekly and monthly. The question is – are these emerging markets indices worth investments?

Emerging markets are countries with social or business activities that are quickly growing and becoming more industrialized. China and India are currently considered the two largest emerging economies today. In a transitional phase between developing and developed status, they are nations where politics matter at least as much as economics to the markets. So, what does this mean for the options trading trader? Below are the pros and cons of binary options trading on emerging market indices.

Let’s start with the pros of trading options on these indices. The best thing about binary options trading on emerging markets is that their performance is generally less correlated with developed markets. So they are a good choice if you are trying to diversify your trading portfolio and reduce overall risk. These markets are much more volatile due to additional political, economic and currency considerations, so there is a chance for large profit through options trading, but at the same time (here is the con) there is risk for large losses.

Let’s look at some real life developments in emerging markets to better understand the behavior of binary options. On February 18, Latin American stocks closed at one-month highs, driven by gains in Mexico, where new pension fund rules were announced – giving greater flexibility to fund managers to navigate volatility. Traders active in this area would also know that the Mexican peso rose 0.44 percent to 12.8230 per US dollar in the wake of the new pension rules. Binary options analysts were optimistic about this development, saying that it should increase confidence in the stability of Mexico’s market, and that it makes peso assets more attractive.

If you were a options trader interested in purchasing digital options related to the Mexican market, you might think about going for Call Binary Options right about now. You could invest in Call Binary Options that expire at the end of the week, since you predict, due to the current trends, that the IPC index will only rise. IPC is the main indicator of the Mexican Stock Exchange. The number of stock series in the IPC’s constituent list is 35, being able to vary.

Just a few days later, binary options traders who were expecting the upward trend to continue would be sadly surprised when Mexican stocks moved lower as US jobless claims rose unexpectedly. Digital options investors saw the IPC Index was lower by 0.05% to 31,634.54. The B shares of copper miner Gruper Mexico were falling about 1.8% and the CPO shares of Mexico’s largest broadcaster Televisa were down by 2%. In addition, the Mexican peso weakened to 12.8685.

Here I will be the digital options devil’s advocate and say these developments could happen just as easily if you traded binary options on the FTSE 100 or the Dow Jones. Abrupt movements happen on indices – that’s what makes binary options so interesting and high paying more times than not.

Previously in the article “Binary Options, The New Investment Tool for the On-The-Go Investor” we discussed the origins and basics of Binary Options.  In this article we are going to discuss the strategies you can use in Binary Options trading.

Conventional Strategies

Typically, when trading conventional futures and options, traders use numerous strategies such as the Collar, Covered Call, Straddle, Spread, Protective Put, and more to minimize their risk of loss when the market is fluctuating up and down in an erratic manner; typically know as a volatile market.  A loss in one CALL trade can be offset or even profitable by a PUT trade made on a different Asset in another trade made at the same time.  Frankly, this type of strategy should be left to the experienced trader.  I could go on for many articles explaining all of the different strategies used in trading, but it would only bore the experienced traders and would greatly confuse the beginning traders.

Simplified Trading At Its Best

The simplicity of Binary Options has enabled the person on the street to get into trading without having to learn the in-depth strategies of conventional trading.  As a result, it has brought a lot of new money into the trading scene to the delight of the average on-the-street investor.  The simplicity of the Price Up or the Price Down and two mouse click trading with as much as an 81% profit has caught the attention of a whole new segment of investors.

“RTSB” – The Simplified Strategy

Along with the simplified trading comes a simplified strategy for trading Binary Options. I like to call it “RTSB” which stands for “Read the Screen Bud”.  Yep, that is right. Open your eyes, turn off the TV, stop texting your friends, close your chat room windows, and look at what is on the trading screen right in front of you.  In addition to displaying the current price and trading period every Binary Options trading screen has a button that will allow you to display the chart of the previous trading period.

While “RTSB” is the visual cue to look at what is in front of you the analytical cue is for you to look at whether the price of the Asset is going Up or Down.  The direction of movement is called the Trend Line and the question you need to answer for yourself is whether the Trend is going Up or is it going Down.

If the Trend is going Up then you would consider making a CALL trade.  However, if the Trend is going Down you want to consider making a PUT trade.

The “DDSS” Strategy

The “DDSS” Strategy is also quite simple, “Don’t Do Something Stupid”.  This strategy is best explained by an example.  As you are looking at the charts for the Asset and you see the current price start to go Up then a few minutes later it goes Down by an almost equal amount, then a few minutes after that it goes Up again.  If you look at the average price during this time period you should see that it remains almost the same.  Some traders call it “Flat lined”, but the trading term is ” Sideways Moving”.  This is where you apply the “DDSS” strategy and DO NOT make any Trades for that Asset.  A Sideways Moving price is very hard to predict and most of the time your prediction will be wrong.  Stay away from it and look for another Asset that has an obvious Up or Down Trend Line.

I must admit, the RTSB and DDSS strategies are really attention getters to highlight that you must pay attention to what you are doing as you can lose money fast if you do not do your own research before trading.

The Spread Strategy

The Spread Strategy is a real trading strategy that has also been simplified by Binary Options trading.  In conventional options trading you use the Spread or Straddle strategy to buy CALLS and sell PUTS on the same Asset.  However, in Binary Options trading you can’t place a Call and PUT trade for the same Asset unless you are using two different trading Brokers which is not recommended.

The basic idea of the Spread in Binary Options is to find two Assets where the Trend line is Up for one and Down for the other.  On the Asset that the Trend line is up you place a CALL trade on it while on the Asset where the Trend line is down you place a PUT trade on it at the same time.

The Spread strategy is often called “hedging your bet”. If both trades end In-the-Money you could receive an 81% payout on both of them.  A $100 Trade Price on each of the trades would result in a $162 profit.  However, if one trade ends Out-of-the-Money you have minimized your loss to $19; $100 loss on one trade and $81 profit on the other trade. However, if both trades are Out-of-the-Money you would have a $162 loss.

Risk Management

In trading, Risk Management is a major process that you must adhere to.  Fortunately, Binary Options are designed to have a fixed payout and a fixed loss per trade thus limiting your risk on each trade.  However, the only limit on poor judgment and gambling fever on your part is your own will power to NOT trade when market conditions are poor or when you are consistently Out-of-the-Money on a majority of your trades. Take a break, step back, and analyze why most of your trades are Out-of-the-Money.  Doing your own research in the Trend Line of each Asset is key to minimizing your risk when trading.

Watch for the next article in the Binary Options Trading series, “Which Market is best for Binary Options Trading?”  We will discuss how you can determine if you should trade in the Forex, Stock, Commodity, or Index markets.