The Basics – Binary Options Trading

Binary options are different from traditional options contracts in several ways. They offer a more flexible and accessible way for investors to purchase options without having a fixed price. Investors of binary options can therefore determine the amount that they wish to commit to purchasing the option.

Binary options also allow investors to predetermine their level of profit and loss prior to purchasing the option. This predetermined payout level is a percentage of the initial investment used to purchase the option. Similarly, the potential losses are predetermined and will result in a loss of the initial investment less the protection rate which is often around 15%. Therefore, When a binary option expires ‘out of the money’ the client can maintain around 15% of the investment position credited back to their account once the trade expires.

The expiration time on binary options can also be much shorter than traditional options, allowing an investor to purchase an option which may expire in a shorter time period such as 5 minutes, or up to one month in the future. Binary options expire at intervals during the course of the day and this makes them particularly attractive for short term traders.

Binary options are trading instruments which provide derived investment in underlying assets. The option contract is derived from the value of the underlying asset and therefore no ownership of the asset exists. Binary contracts have an expiry time and date when the contract will either be considered as ‘in the money’ or ‘out of the money’. This reflects whether the call or put option expires above or below the strike price. To which extent the binary option can be considered as ‘in’ or ‘out of the money’ is irrelevant to the predetermined level of profit and loss.

The simplicity of binary options trading

An example of this is an investor who believes that, over the course of the day and after an inflated rise, the value of gold will fall to around 1588. The investor logs into her account with a view to executing a put option of $100 at 9:00 with an expiry time of 14:00. The payout level for this option is 120% with a current strike price of 1590. The investor executes the trade and at 14:00 the option expires with the price of gold at 1589 giving a successful payout of $120 on her $100 investment.

Binary options offer a fast, exciting and accessible way to trade financial markets. Although they are very simple to understand and their execution is also straightforward, Investors should stick to markets that they are familiar with in order to maximize their chances of making high returns in a short time frame. After choosing the underlying asset you wish to open the trade on, the next step would be to choose the time frame for the expiry. Then the next step would be to choose the direction of the option. If you are confident that the price will rise during this period, purchase a call/high option. If you believe that prices will fall, purchase a put/low option.

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