Binary Options
Binary options; also known as digital options, are a cross between traditional buy-and-sell options and those of fixed returns. One of the major differences between trading the stock market and trading binaries is that with binary options, you don’t actually own the share, you just bet on the performance of the share price.
Unlike a spread bet a binary option does not require a margin, there are no stops and the trader knows the exact maximum risk and maximum profit. Unlike CFD’s these products are still tax-free and will likely to remain tax-free for years to come.
Do not be overwhelmed by this new system; more and more financial traders are finding it the most simple, ‘straight up’ and enjoyable way to get the best out of online trading.
Let’s first understand!
Imagine you are a trader who is willing to trade options and risk 1 dollar on the idea that Euro/Dollar’s exchange rate will move higher in one hour from now. If your guess is correct, you can anticipate a fixed return on your investment (70% for example). On the contrary, if your binary Euro/Dollar option move against your anticipation (below the strike price), you will end up losing your initial investment of 1$ and get a zero dollars return, from here the name binary option derived. When trading binary options we only have to ask ourselves two questions. First, what is the current price of the market we are analyzing? Second, do we anticipate price to be higher or lower in a fixed time from now?
So, for example: you would be considered “in the money” in the two following cases:
In the Money: Assuming you choose CALL (Above) – At expiry if the closing price closes above the price that you purchased
In the Money: Assuming you choose PUT (Below) – At expiry if the closing price closes below the price that you purchased
Binaries came about as traders and investors worldwide strove for new, simplified ways to trade options across the financial markets. Binary options are a cross between traditional buy-and-sell options and those of fixed returns. However, do not be overwhelmed by this new system; more and more financial traders are finding it the most simple, ‘straight up’ and enjoyable way to get the best out of online trading.
Trading Binaries- How does it work?
Binaries, can have only one of two possible outcomes. When trading binary options we only have to ask ourselves two questions. First, what is the current rate of currency we are analyzing? Second, can we expect the rate to be higher or lower in a fixed time from now? For example, imagine you are a trader who is willing to risk $100 on the idea that Euro/Dollar’s exchange rate will increase in one hour from now. If your prediction is correct and the fixed return rate is 70% you will receive $170. If incorrect and your option decreases below the strike price, you will lose your initial investment and receive nothing. The term ‘binary’ thus suited this all-or-nothing type of trading. You should now be starting to realise why binary options are fast becoming the simplest way to trade the markets and are yielding large profits for online traders. But here are a few more factors to help you:
Benefits of trading binary options
1. Controlled Risk – The percentage reward is known from the outset, as is what the player stands to lose i.e the exact amount they placed.
2. Easier, simpler – The player only needs a sense of direction i.e. ‘Will the exchange rate increase/decrease in half an hour?’
3. “In the money” – For a profitable trade to take place there is a need for price to close in-the-money, a winning trade will receive the entire payoff, even if was ‘right’ by a single tick.
4. Protection – A safer option to take if a trader has an open position elsewhere in currency, stocks etc. Utilizing a binary option can eliminate a further loss elsewhere.
5. Punctuality – Binary contracts are being issued around the clock, allowing traders to trade on multiple time frames. There is always an expiration time arriving, which constantly yields new opportunities for binary traders.
Select Direction:
1. “Call Option” – Select call if you believe that the instrument will close above the current price
2. “Put Option” – Select put if you believe that the instrument will close below the current price
3. Select Investment amount
Example:
binary option - binaries
Digital Option Calculation
The cash-or-nothing digital option provides a fixed payout of M when the price of the underlying instrument S ends up above (in the case of a “call”) or below (in the case of a “put”) the strike price K.
Binary option formula
This can be visualized as follows, with the height of the horizontal bar equivalent to the payoff M:
Digital options
The following instruments are available on TradeSmarter.com:
US Stocks Options:
Apple- Symbol:AAPL
Cicso- Symbol:CSCO
Citybank- Symbol:C
Google- Symbol:GOOG
Microsoft- Symbol:MSFT
Yahoo! – Symbol:YHOO
Jet Blue- Symbol:JBLU
Forex Options:
EUR/USD
GBP/USD
USD/CHF
USD/JPY
USD/CAD
GBP/JPY