Binary Options

We are all familiar with the basics of trading – a trader studies the market and buys an asset at certain price, hoping that its price will rise and he will sell the asset at the new higher price and profit from the difference.

In binary options trading though this is different. Yes, the trader, otherwise known as the buyer, will look into the market and yes he will decipher which way he thinks the market will move, but the outcome and method of profiting is somewhat different.

Here the differences are clearly explained:

Traditional trading: there are a multitude of possible outcomes, none of which are known when buying the asset

Binary option trading: there are only 3 possible outcomes – or the asset expires in-the-money, out-of-the-money or at-the-money. All three outcomes are fully known when purchasing the option and therefore all potential risks can be taken into account.

Traditional trading: the profit or loss is dependent on the magnitude of the price rise/fall of the asset e.g. if 200 shares are brought at $10 each, the amount of profit or loss is totally dependent on how much the price of the asset rises or falls

Binary options trading: it is only the direction of the move that is important and not the magnitude of it. So, if a buyer places a $2,000 Call option on an underlying asset with a 71% return rate, he knows from the onset that if the option expires in-the-money then he will receive $3,420 and if it expires out-of-the-money then he will receive a 15% payback of $300.

This is because all of the outcomes of a binary option trade are known from the onset of the contract. This reduces the risk factor and also limits the knowledge that a buy must have before he purchases an option.

Traditional trading: the trader owns the asset itself

Binary option trading: a buyer is just trading on the performance of an asset

Traditional trading: the trader will need an in-depth knowledge of the market and the asset being traded

Binary option trading: a buyer need only have a sense of the direction in which the asset is likely to move in since he is just trading on the performance of an asset, rather than the magnitude of the price change

Traditional trading: the asset can be sold whenever it suits the trader

Binary option trading: when buying the contract, a buyer can decide between different expiry times – end of the hour, day, week, or month. Once his expiry time has been selected and the option is purchased, this cannot be altered or reneged.

Binary options trading is an extremely unique method of investment and it creates a new and exciting offer for those wanting to control their investment risks.

To trade binary options is about speculating in which direction an asset is likely to move. No shares need to be bought, no currencies traded. It is a simple and efficient way of investing in the financial markets with a small budget and limited trading skills, whilst also benefiting the more experienced trader too.

Trading on our platform is a matter of speculating higher or lower i.e. will the price of the underlying asset at a set time in the future be higher or lower than its current price, known as the strike price.

To trade binary options with us, an investor must select the underlying asset, the expiry time and the direction in which he speculates the asset will move. The underlying asset is what the option derives its value from and it could be an index (e.g. Nasdaq), commodity (e.g. Oil), currency pair which is also known as forex (e.g. EUR/USD) or stock e.g. (Apple), of which we have over 60 on offer. The expiry time of the binary option trade dictates when the contract ends and it can be the end of the nearest hour, or the end of the day, week or month. The investor then needs to consider the direction in which he believes the asset will move. If he thinks UP, then he will buy a CALL option. If he believes DOWN then he will buy a PUT option.

An option is considered in-the-money if it expires above the strike price in a Call option or below it in a Put. An option is considered out-of-the-money if it expires below the strike price in a Call option or above it in a Put. When you trade binary options you will receive payouts of 65-71% for options expiring in-the-money and even a 15% refund for those expiring out-of-the-money.

Take the below situation as an example of how a binary options trade can work:

Underlying asset – Nasdaq

Strike price – 2,164.460

Expiry time – 15:30

Investment – $1,000

Return – 71%

Expiry level – 2,167.20

Situation 1:

A Call option is purchased. At the expiry time of 15:30 the expiry level 2167.20 is above the strike price and therefore in-the-money. We pay the investor a $1,710 payout

Situation 2:

A Put option is purchased. At the expiry time of 15:30 the expiry level 2167.20 is above the strike price and therefore out-of-the-money. We pay the investor a refund of $150.

Binary options are an easy and increasingly popular way to profit from the financial markets. A binary option is simply a wager that a security will close above or below a certain price. If the trader is correct, they will receive a fixed payout, which can range from 60% to 500% or more!

An option is purchased at at set price, called the strike price. When a Call is placed on an option, this means that the option must close above the strike price for the trader to profit. For a Put option, the close price must be below the strike price. All options have an expiration time. The closing price at the expiration time determines whether the trade is profitable or not.

There are several varieties of binary options. The simplest are fixed-payout options, wherein the current market price is the strike price for the option. If the trade expires “in the money”, the trader will received a fixed payout of 60-70% of their original investment. On a losing trade, the trader will receive a credit of 5-15% of their investment amount. These options are typically hourly, although longer term options are available.

The American Nadex exchange offers a more conventional form of binary option with variable pricing. The potential payout and loss of the option depends on the price which it was purchased. These binaries can also be traded intraday. Other varieties of binaries are available through UK spread betting firms, such as One Touch and Up and Down binaries.

Binary options are available for forex, stocks, indexes and commodities, but we will focus on forex due to the easy availability of chart data and technical analysis tools. You can use any form of technical analysis for trading forex binaries. Fundamental news events such as unemployment numbers and interest rates allow for easy forex profits. You can even hedge your swing trades using binaries.

Some basic strategies for trading binaries include trading on strong trends, trading on reversals near support and resistance, and trading news events. For Nadex binaries, trade cheaply to get the best risk/reward ratio, or trade near certainties to assure regular small profits.

Binary options are becoming the one trading vehicle most appropriate for newcomers, without the learning curve associated with spot forex or stocks. You can profit simply from your opinion on whether the market will close up or down.

Many people are looking for a simple investment. The ability to make money quickly by investing in the stock, commodities, or forex markets is always something that has appealed to many. The difficult part is finding the time, and money to actually make that happen. If you want to do it yourself (and who doesn’t?) it really can be a daunting task. Now, many people are turning to binary options to make investments. They appeal to many as a simpler way to invest. They are unique, but are they right for you? Lets look at the good, and the bad.

First we’ll look at some reasons why you might want to use binary options to invest money.

- Simplicity

This is the main reason why people gravitate to binary options. They are much simpler than most investments. Basically it is as simple as choosing if a stock, commodity, or currency is going to go up, or down.

-Large profits

When you make an investment with this type of option, you stand to gain between 65 and 81% profit. That is more than most investments can offer.

-Short Term

I don’t know of any investment that has the potential to return 65-81% on investment in as little as an hour, but that is very possible with binary options.

-Guaranteed Returns

If you have been avoiding buying stocks because of the total unknown, you might like binary options. The great thing is that you know exactly what you stand to gain, or lose before you put any money at risk. Combine that with the short term, and you take a lot of unknowns out of the equation.

Now we’ll look at some things that might deter you from investing with binary options.

-Risky

Having to predict the very short term trend of a stock, or other asset is not easy. Especially when you consider the overall volatility of the markets. Predicting what direction a stock is headed in within a n hour is very risky.

-Large Potential Losses

Just like the potential gains, the potential losses are also large. Combine the potential losses with the overall riskiness and you have to be in the right position to make an investment like this.

-Fewer Assets

When dealing with online binary options brokers, you have much fewer options in terms of assets to choose from. Just a small percentage of what is readily available on the NYSE.

When dealing with hard earned money, it is important to invest it in a way that works for you. Binary options are a great way to do that if you are not put off by the riskiness, and lack of assets. The great thing is that you can start small, and learn as you go. You don’t need to put huge amounts of money at risk. The most important thing to remember is to do your research. That is what will give you a chance to tip the odds in your favor.

With the popularity of digital or binary options, you would think there would be no question that you could make money with them. However, we get questions all the time from folks wondering if you can really make money with binary options.

Even though the digital option market is not controlled by Wall Street (at least not yet – Wall Street does have their eye on the industry), there are banks, gaming, and other players getting involved.

Actually, the odds of making money with binary options are much higher than with other types of trading. For instance, the US futures market shows that only five percent of investors make money consistently. Other reports show that on any given day as many as fifty percent (or even higher by some estimates) of a binary options broker’s traders have made some money.

Because the binary market is not regulated (again, at least not yet), it is nearly impossible to get a complete picture of the industry and how many traders are successful. At best, you can only go with what binary brokers will tell you (and most of them won’t give you any numbers).

The best estimates I can give are based upon the traders we have taught over the years. Our successful futures traders were well over the five percent industry average (from the surveys we have taken over the years). Our early results for binary trading has been even higher. Of the ones who answer our requests, well over fifty percent were making money with binary options.

So, what is the secret to making money with binary options? Well, there are no secrets really when it comes to trading anything. The information is out there, you just have to do your homework. Then, test your strategies before you put real money on the line. You can do the research yourself and no doubt find the binary strategies you need to be successful.

The better route would be if you could find a course or someone who is actively trading that will share their strategies with you. If you are currently trading futures, Forex, commodities or anything else, your market analysis can be the same. It is just that when you pull the trigger on a trade you are buying an option instead of a futures contract or other vehicle.

So, can you make money with these fairly new digital options? YES. If the odds don’t sound that great to you, just compare them to success rates in other financial industries.

Previously in the article “Strategies for Binary Options Trading” we discussed the new simplistic strategies used in Binary Options trading.  In this article we are going to discuss how you can determine if you should trade in the Forex, Stock, Commodity, or Index markets.

Do Your Due Diligence

Due Diligence is the buzzword for doing your own research.  It is important for you to research your target market before starting to trade.  In conventional trading you would look at the historical charts, financial reviews, SEC filings, economic indicators, and news reports.  In Binary Options trading since the typical trading period is one hour in length, studying the charts, reading the news reports, and watching the effects of economic indicators will be sufficient in most cases.  However, many experienced traders can’t help themselves in continuing to do more in-depth research.

Which Market Is Best?

Deciding on which market to trade in is a really tough question.  Each market has their pros and cons.  Part of your research into which market to trade is understanding the make-up of each market.  Remember the Spread strategy that I discussed in “Strategies for Binary Options Trading”?  In that example I used two currency Assets as the initial selection to make a CALL trade and an offsetting PUT trade.  In reality, you do not have to make the CALL trade and the PUT trade in the same Market.  As an example, the CALL trade could be in the currency market and the PUT trade could be in the Stock market.

In order to select which market to trade in let us take a brief look at each of the four markets:

Currency Options Market

The Currency market, also known by the popular name of the Forex market is composed of currency pairs such as the relational value of the EUR (The Euro) vs. the USD (U.S. Dollar).  There are many currency pairs available for trading.  Each broker has their own list that they make available to the public.  One of the advantages of the currency market is that it doesn’t have any baggage that it carries with it in the way of stock certificates nor is it constrained by many SEC regulations requiring report filings.  It is strictly a relationship between two defined currencies.  The currency markets are heavily influenced by economic indicators and world affairs.  Also, the price movements can be extremely erratic and change rapidly.  Currency markets are open 6 days a week, 24 hours a day.  Currency Binary Options are best traded between major economic news events.

Index Options Market

The Index markets, like the currency markets do not have the burden of certificates and SEC regulations as compared to the Stocks market.  However, the Indexes are composed of valuations of many Stocks therefore, a major change in any one stock affects the value of the Index.  Indexes tend to have longer trend lines, but can reverse themselves sharply after an economic announcement or world economic event.  Examples of well known Indexes include: the Dow Jones, Hang Seng, NASDAQ, S&P 500, Bombay 30, IBEX 35, IPC, and the SSE 180.  Index Binary Options are best traded after major company announcements for companies that make up that particular index.

Stock Options Market

The Stock markets are based on stock certificates issued by companies.  Well know examples are IBM, GOOGLE, Yahoo, and Microsoft.  While they are affected somewhat by economic indicators due to panic selling or buying by investors they are more influenced by a company’s financial and productivity news.  Stock Binary Options are best traded immediately after major news and earnings reports involving that particular company.

Commodities Options Markets

Commodities markets are based on commodities which are agricultural or industrial in their raw and unprocessed state such as gold, copper, silver, oil, natural gas, etc.  Commodities are typically traded on the future price of the product.  Intraday prices of commodities tend to be Moving Sideways in their Trend lines except when there are major news events about the commodity and around inventory, demand, and import report times.  Futures Options are based on 3 month contracts thus making the best time to trade Commodities Binary Options at the start and midpoint of the futures contract period. Commodities are very sensitive to economic reports in which they are related.  As an example, a hard freeze report in the citrus growing regions before harvest will affect the futures prices of citrus crops.

As you can see, each market has its ideal time to trade Binary Options.  By doing your own research into the various markets you’ll find your ideal point in which to trade.

Watch for the next article in the Binary Options Trading series, “The Importance of Economic Indicators in Binary Options Trading.”  We will discuss the effects economic indicators have on the trading markets.

Trading binary options is a high risk/high reward means of making money online and should only be undertaken by those that are serious about putting forth the time and energy into creating a trading system designed to swing the odds of profitability away from the house and towards your account. The highlighted keys to successful binary options trading should lie at the core of your trading system. Implement these ideas into your trading activities and you will be well on your way to creating a sustainable source of secondary (and possibly primary) income for you and your family.

Key #1: Know Your Names

Limiting the universe of names you trade should greatly enhance your probability for profitability in binary options trading. I’ve traded options both professionally and personally for close to 10 years now and one of the early lessons I learned was to not try to keep up with the happenings in all sectors all the time. There is too much going on in the world and trying to keep abreast of news in financials, retail, technology, energy, healthcare, and biotech sectors is an overwhelming, all consuming chore. However, if you minimize your list of target companies you can really get to know the companies intimately and gain a grasp for how they trade on a day-to-day basis. Fortunately (or unfortunately depending on how you look at it) the binary options trading platforms in the market today have a limited number of assets to trade, thus picking a few to get to know on a more intimate basis should not be that difficult.

Key #2: Pick Your Binary Options Trading Platform

There are several binary options trading platforms in the market, all with unique characteristics. The two binary options trading platforms that tend to stand out are EZTrader and Anyoption. In terms of picking underlying assets to trade, if you like to trade US stocks EZTrader would be the choice; if you’re more of an Index trader, Anyoption would seem to make the most sense. Both platforms have a decent number of commodity and currency options contracts available to trade.

Key #3: Trade, Trade, Trade

One of the big mistakes we see beginning traders make when starting out is they fall in love with 1 or 2 ideas and crash and burn with the outcomes. This isn’t a good strategy if you plan to have any kind of longevity in the binary options trading business. The goal is to trade multiple times a day, give yourself a chance to win. Think about it, say you have a system that can accurately predict stock movement in short timeframes 70% of the time. If you only trade once or twice during the day there is a very good chance that you finish the day in the red or break even. However, if you trade over 10 times during the day you theoretically increase your odds of winning. With no true fees for trading, there are really no obstacles to placing as many trades as you like. Most successful binary options traders make in excess of 10 trades a day.

Key #4: Manage Your Risks

Binary options trading is inherently risky. Most platforms will offer returns in the 60-80% range for your winners and return/rebates of 5-15% for your losing trades. The odds are clearly not in your favor. The house is banking anywhere from 5-25% (risk free!) on trades where they can find and match buyers of calls and puts. The risk profile of placing one trade and hoping that if goes in the right direction is not a profile we recommend investing in for the bulk of your portfolio. That is why we rarely place one trade on a given asset without following it up with a complementary trade prior to expiration. This follow-up trade can be a purchase of another option on the same asset in the same direction, a purchase of another option on the same asset in the opposite direction, or a purchase of another asset completely, hedging the correlation between the two underlying assets. There are a myriad of ways to structure binary options trades that can diminish a decent bulk of the risk inherent in purchasing one contract.

If you are trading binary options you already know of the big advantages this kind of trading offers. What I will try to show in this article is a very simple strategy that can be applied in certain situations and give great results for those who trade using binary options.

The strategy I’m about to explain is based on hedging and tries to obtain high profits while risking only a small investment. The strategy can be applied only in certain circumstances but it will prove to be very useful for any trader.

To best describe the strategy I will use an example from the very beginning and explain how to use the strategy on that particular example. Let’s consider that you bought a CALL option on NASDAQ worth 100 dollars with the deadline after 12 hours. The NASDAQ value was 2380 at the time you bought the option and after 3 hours it raises to 2430 (a 50 points raise). In this moment you will have to buy a PUT option on NASDAQ worth the same amount and with the same deadline as the first option.

After purchasing the second option you have two possible outcomes: both options are winners if the NASDAQ price will be between 2380 and 2430 at the expiry, or you have one winning and one losing option, if the expiry value is lower than 2380 or higher than 2430.

Now let’s analyze both possible results, considering the NASDAQ option had a 80% profitability rate and a 10% refund for losing trades. If both options are winners you will have a total profit of 160 dollars, while if you have one winner and one loser you will end p losing 10 dollars.

To resume the above, this binary options strategy ensures that you can lose only a very small amount with the chance of winning very much. The only disadvantage is that you can only use it in certain situations, when you already have an option that had a very good start.

There are many more possible strategies to use when trading binary options, but I like very much this one because it gives you the possibility to win a lot while risking very little.

By now you have probably heard about Forex trading. You know that Forex is a multi trillion dollar market, you know that you are able to trade large sums of money with minimal capital, and chances are that you know just how complicated the actual trading can be. What you don’t know is that there is a good alternative to Forex trading: Binary options trading.

Binary options trading is an up and coming space right now with many Forex traders testing out the Binary options (B.O) waters. Why are we seeing so much crossover between Forex trading and B.O?

The answer is quite simple. The two industries are very similar in a lot of ways. To name some of the areas that there is overlap, when B.O trading, you can actually trade Forex currencies. In addition, you are in essence predicting the movement of the asset based on the analysis of the Forex market.

In addition, just like in Forex trading, Binary options requires a very small amount of initial capital and the option to profit is in both directions. If you predict that the asset will decline and it does, you make money and if you predict it will increase and it does, you also make money. Same as Forex trading.

So if there is so much common ground between Forex trading and B.O trading, why are so many people leaving the former and going over to the latter? Well, the truth is that as attractive as Forex trading is to many people, B.O has some clear advantages.

For starters, trading B.O is significantly simpler than trading Forex. You decide if you think the asset will go up or down and that is all. No charts, no analysis, no Fibonacci, and no retracements.

In addition, profits in Binary options are immediate and transparent. Finally, all binary trading platforms are Web based meaning you can trade binary wherever you are as long as you have internet connectivity.

Whether you choose to trade Forex or binary options, it is important to have some sort of a strategy, which includes your financial goals, your exit points, and an exact definition of how much money you are willing and able to risk.

The world we live in is structured around choice, from what type of bread to buy right through to your political views. This freedom to choose and consequent sense of direction is a concept mirrored by global financial tools. Equally the inherent responsibility associated with a single choice can be a daunting prospect. Setting parameters to protect your financial decisions is an important part of controlled risk exposure.Binary Options epitomize trading choice within a strictly limited risk environment.

The word binary is derived from duality, the idea of two. These financial products are based upon a relatively simple premise either ‘yes’ a specific statement or proposition will occur or ‘no’ it will not. Binaries are at times referred to as ‘all or nothing’ propositions or ‘digital options’; each label echoes this pervading sense of two. Binary options stand out against traditional options as a result of risk and reward. When binary trading your risk and reward is already known, you cannot lose beyond the initial amount of collateral you have invested. This capacity to factor in risk is a powerful tool when integrating binaries within a forward thinking trading portfolio.

Let’s consider a binary based on the Standard and Poor 500 Index. Before implementing the trade, a trader’s decision to go long on the S&P 500 is usually based on a desire for the S&P to rise in value and therefore buy a binary option. Binaries offer ‘all’ or ‘nothing’ payouts; the trader will be in profit if the option expires at a level greater than the strike price.

The trader certainly does not own the entire S&P 500 index rather they are trading on price movement within the index. In contrast to the above options, a short binary option will payout, if the underlying settles below the strike price at expiry or will pay nothing if the underlying index settles at or above the strike price at expiry.

European and American binary options differ slightly. European options come into play literally just before the expiry point is reached. Alternatively American options offer enhanced flexibility with the capacity to be exercised at any point within the options contract. Due to the fixed nature of European options there is an assumption of less risk and therefore a lower premium charge. On the other hand, the increased level of flexibility associated with American Style options means that the trader is likely to charge a higher premium.

When considering investing in binaries it is important to do so using a safe, regulated, trading platform. Chicago based Nadex, also known as the North American Derivatives Exchange, is an example of a fully regulated exchange listing financial products on a limited risk basis. The exchange also contains a range of educational resources for the novice and more advanced binary options trader. Tradable binary options products listed on the exchange include: stock index futures, spot forex, commodity futures and economic events.

The above information does not constitute as investment advice. Binaries involve a risk of loss.