What are Binary Options ?
Binary options are a type of investment where the trader aims to get a payout by making a correct prediction out of two possible options provided in the trade. In binary options, an asset is provided, and a set of two possible outcome options are provided. The trader chooses one of the options, allows time for the trade to expire and if the option chosen was correct, gets a percentage of the initial investment as a payout.
Binary options or “two options” trading traces its origins to the early 1970s where they were first traded as Over the Counter (OTC) instruments by institutional traders. The formation of the Chicago Board Options Exchange (CBOE) and the Options Clearing Corporation (OCC) helped paved the way for a more structured and regulated way of trading these instruments. However it was only in 2007 that the Securities and Exchange Commission proposed the opening of this market to retail investors.
By 2008, the CBOE approved binary options as all-or-none, fixed return investments, which could only present exchange-traded assets for trading. In Europe, binary options companies started to crop up, but they offered binary options on a price-based traded model without necessarily requiring that exchange traded assets be the only assets traded on their platforms. There are now thousands of companies offering binary options products in Europe and Asia, but the market in the US has undergone little change from its 2008 structure.
How Binary Options Work
Binary options have certain characteristics. They are a bit different from the Forex trading or commodity trading methods and it is important understand these characteristics.
Binary options trades are not leveraged. This means that the margin requirement for each trade is 100% supplied by the trader. This has a bearing on how much capital you need to start trading.
All trades have expiry times. Therefore, you must be sure that your chosen option will be correct when the time allocated to the option runs out.
Assets from the four major asset categories (currencies, stocks, indices and commodities) can be traded. This provides a wide list from which traders can choose what to trade.
Several types of binary options exist. This means that traders can trade not just the direction-based binary options such as Call/Put options, there are other possible options which could be traded.
Binary Options Types
Several binary options can be traded. These are as follows:
Call/Put option. This trade type is also known by other names on various platforms. Some call it Up/Down, others may call it Above/Below, Rise/Fall or High/Low. They all mean the same thing: traders choose whether the price of the asset will be higher or lower than the trade entry price by the time the trade expires.
Touch/No Touch: A price is given, and traders choose whether the movement of the asset price will make contact with this price or not.
One Touch: Also called Touch Up/Touch Down, traders choose which of two prices given (one above and another below the market price) will be first touched by price movement.
In/Out: Also called the Tunnel or Boundary or Range trade. Two prices are set; one above and the other below the market price. Within this band of prices, traders choose whether the asset price will remain within the band (IN) or go outside the band (OUT). Some brokers will classify making contact with either of the two prices as an OUT option.
Some brokers will add some other options to this list, however these are the basic binary options types that will be found on the broker platforms.
US-style options only offer binary options on a BUY/SELL basis, with a score of 0-100 for an option which ends out of the money or in the money. The market price at trade entry is either subtracted from 100 for a BUY, or added to 0 for a SELL, and multiplied by the number of contracts purchased to arrive at a payout or a loss, depending on the trade outcome.
How to Start Trading Binary options
In order to start participating in online binary options trading, the trader must fulfill the basic requirements which are listed below.
The trader must open an account with a binary options broker such as ExpertOption, so as to be able to get access to the market using the web-based or mobile trading platform. There are many scams out there, so only use regulated and licensed binary options brokers. If you have found one, fill the online account opening form.
To transact on a binary options platform (i.e. to deposit or withdraw funds), you need access to a credit/debit card, a digital wallet or a domiciliary bank account. Find out which deposit/withdrawal option is offered by your broker and see if you can get access to it.
Most binary options platforms are web-based. Use the account login details sent to you when you opened the account to access your account on the web-based platform. Alternatively, you can use the mobile trading app offered by your broker.
You will need to verify your identity and address. The documents required for this are an international passport (or where allowed, a drivers’ license and national ID card). Also, a bank statement of utility bill is required as proof of address.
Once all these are in place, the trader is ready to start trading binary options.
Once your account is setup, you can start to trade binary options. However, there are some important points to note.
Most binary options platforms do not offer demo accounts. Therefore, you will need to practice with no-deposit bonus live accounts, or you can fund a live account with little money and test the trading process.
You can also use any of the good binary options robots out there to trade in an automated fashion.
The use of bonuses has now been outlawed in several places. Always confirm from the regulator if your broker is allowed to offer you a bonus. If this is banned in your jurisdiction, do not use a bonus.
You can also use a social trading platform to trade binary options.
This is what binary options is all about.