How Do Binary Options Work?
February 23, 2023
As the name suggests, binary options trading is conducted when the trader is provided with two choices. In this case, the choices are termed call and put. Binary options traders can trade in multiple assets including stocks, forex, indices, and commodities. This is an all-or-nothing style of trading.
Most trade-supporting platforms provide users with some basic binary option trading information; however, if you are a beginner and are in the search of the basic know-how of binary options trading, then you have found the right article!
How to Conduct a Trade?
To conduct a trade, you need to study the recent history of the selected underlying asset and then place your bid, i.e., call or put, on whether the price of this asset would increase or decrease in a predetermined frame of time. If your prediction comes true then the money you risked would be returned, plus you will get a profit. However, if your prediction goes false you will lose the risk amount.
For example, the current price of gold is $1509, and you have predicted that it will rise in 1 hour. The winning trade offers an 80% return on investment. If you place a $100 bet on this idea and win the trade, then even if the price of gold has risen to just $1510, you would win $180. However, if you lose the trade and gold goes down to $1508 then you will lose your $100 entirely. In binary options trades, the magnitude of the price movement has no impact on the return on investments.
What Markets Can You Speculate with Binary Options Contracts?
The following are the lists of markets you can use binary options to trade in:
- Stock Indices
There are multiple platforms that allow you to trade on these markets, but before using any of them you should make sure they operate legally and are secure.
Key Elements of Binary Options Trading
To make a trade using binary options, you need to keep the following three key elements in mind.
The expiry time is the length of time from when you buy the contract until it closes. The range of this time can vary from 60 seconds to over a month. Most binary options traders online prefer to employ the short-term trading option, which can be anywhere from 60 seconds to 30 minutes.
The strike price is the initial price you enter the contract with. This is the price that determines whether you win or lose. If by the end of your predetermined timeframe, the rate of the asset crosses the strike price, then you will win the trade, else it would be a loss. For example, if you look at the above example, then $1509 was the strike price for this particular contract, and to win the trade this was the price gold had to cross.
The payout offer is essentially the return or investment your selected broker is offering to you. The percentage your broker promises on either the win or the loss is considered the payout offer. For instance, in the above gold example, the payout offer for a win was 80%, whereas it was 0% for a loss.
Some brokers do offer a return on investment on losses as well, which goes as high as 10%. However, this differs depending on the brokers and traders. The payout offer is made clear before any money is invested so that the trader may be aware of all the possible outcomes.
Types of Trades
When binary options trading was first introduced in the market, it offered only two options, mainly call and put. However, now there are a series of trades it has added to its forum as its popularity gained more followers.
One-Touch or No-Touch
In this type of trading, you need to select three basic elements, which are the type of asset you are interested in investing in, the price target you are willing to trade with, and the expiration time of your trade. The price target is flexible and can be set at any point, however the farther it is, the better. The farther you will set your target price, the higher amount of payout you will receive.
High or Low
This is the most basic form of binary trading. Here you will need to predict whether the price of your underlying asset will go high or low in a set period. In this case, you need to thoroughly study the recent history of the assets, and analyze them to the brim. This is to increase the chances of you winning the trade.
This type of trade as determined by the title is performed in pairs. Firstly, you need to select two main assets and then predict which one among them would perform better. If your prediction comes true then you win the trade, else you lose. This is highly popular in Forex, for example, EUR-USD is one of the most popular currency pairs traders come across in the forex/binary trading world.
Binary options are an all-or-nothing type of trading. Here, you will either win all or lose all. There are some key elements including the expiry time, strike price, and payout offer. Binary options also offer a series of trade types, including high-Low, pairs, and one-touch or no-touch.