If you are over 18 years old and have an internet connection, you can start trading in binary options. Remember that it has a steep learning curve, and to profit from it, you need to devote enough time and financial resources. Here are some of the most basic concepts in binary options to get you started.
What Are Binary Options?
Binary options are a type of option in which the payout is either a fixed amount of cash or nothing at all. In other forms of security trading, the profit is determined by the difference between the opening and closing price. Or the difference in the buy and sell price of the security. In the case of binary options, the profit is pre-agreed. It is a contract between the trader and the broker. That is the reason binary options are sometimes known as “all or nothing” options. At other times, they are also known as digital options.
Due to their nature, binary options are sometimes quite easily manipulated. If you think about it, binary options are a lot like gambling. You are essentially betting against the broker. And, if the broker happens to be unscrupulous, it could easily manipulate the trade so that it goes against you. Binary trading scams can take on various other firms as well, where you cannot get payouts for trades you have profited from.
How Are They Traded?
Binary options are traded through a binary options broker. The broker can offer binary options from various markets. These markets are the underlying assets of the options you will be trading in. Some examples of underlying assets are given below.
- Forex – They can be currencies such as the GBPUSD pair, the AUDUSD pair, or the JPYUSD pair.
- Stocks – These are traditional equities. They can be from listed companies like Apple or Facebook.
- Indices – These are entire indexes. Some famous ones are the Dow Jones, the DAX, etc.
- Commodities – The underlying assets can be in the derivatives markets as well—precious metals like gold and silver. Wheat, oil, and sugarcane are all good examples.
Out of all these, the forex options are the most popular binary options offered. Customers also demand these the most.
The Call and Put Options
Binary options can be divided into 2 categories – the call option and the put option. It is quite similar to the traditional derivatives market. If you believe that the underlying assets you are trading in will increase in value, you can exercise a call option. If, on the other hand, you think that the underlying asset is going to decrease in value, you will exercise a call option.
Binary options are traded in a set time frame. Here are 2 examples.
- Let’s say you believe that in the GBPAUD pair, the GBP will increase in value against the AUD, or the AUD will decrease in value against the GBP. You also believe that this depreciation will happen in the next 60 seconds. You then set up a trade with the broker for that time frame. And, you win the trade if the GBP does appreciate within those 60 seconds. Remember, since you are speculating on an increase in value, you will put in a call option.
- Let’s say that you think that within the next 15 minutes, the price of gold will fall. You set up a pre-agreed fixed trade payout with the broker for 15 minutes. You think that the price will fall this time, so you set up a put option. When you initiate the trade, if after the 15th minute the price does fall, you get the payout.
Times of the Day That You Can Trade
As you already know, binary options have a range of underlying assets. Thus, the times of the day that you can trade will also depend on the type of binary options that you are using.
The most popular one, the Forex market, is open 24 hours a day, 5 days a week. Thus, you can trade Forex binary options during these times. The equity and commodities markets, on the other hand, operate according to their home markets. For example, the New York Stock Exchange is open from 9 a.m. to 4 p.m. Eastern Standard Time. The Tokyo Stock Exchange is open from 9 a.m. to 3 p.m. Tokyo time. So, wherever you are, you can trade in their markets as long as they are open.
These are some of the rudimentary concepts of binary options. It is just the beginning, so keep on researching!