Binary Options Trading
Binary options trading is becoming an increasingly well known type of short term investment, you may hear them referred to by a number of other names but they are all describing the same type of transaction. An option is not a share purchase, it is simply a contract between two people, if you suggest the price of an item is going up, then the other party says it is not. The person who is right keeps the funds.
Of course, you are normally trading against a broker not an individual. Once you have decided which direction the price is about to move in you will need to decide a time frame for your expected movement and the price it will reach. You will then purchase an option, in effect a contract, which states that should your prediction be true you will receive a guaranteed payout, if it is not true you will forfeit the money you have invested.
How To Make Money On Binary Options?
The word binary actually emphasizes the possible results; either you are right and ‘in the money’, or, you are wrong and ‘out of the money’. You are either right or wrong; there is no middle ground. Although there is a risk, as with any investment, your losses will be limited to the funds you have invested.
Binary Options - European or American style?
The majority of options are known as European style. These types of options cannot be changed once you have started your trade and the outcome is based completely on the value of your asset at the expiry time.
In contrast, US binary options version, which is also known as the one touch option, simply has to reach your target price within the time period agreed when instigating the trade. These can carry less risk but this is likely to mean a lower rate of return.
Binary Option Time Frames
Most binary options work on short term timeframes; this is simply because it can be very difficult to predict what will happen to a specific asset in the long term; there are too many economic and even political factors which can affect the price of any asset. Most trades will come into force within a minute or two of the trade being completed.
The majority of binary options will trade within a range of between thirty seconds and the remainder of the day, although it is possible to trade for longer.
The Types Of Binary Options
There are several types of binary options but most of them can be classified as one of these two categories:
Cash or Nothing
Before you place your trade you will know exactly what return you will get, if your expectations are correct. This way you will always know how much you could get as a return on your investments and you will know the maximum loss you can make. It is a way of reducing risk whilst investing.
If your asset increases or decreases in value to at least the figure you have predicted then you will receive the agreed return (which includes your original funds),if not, you receive nothing.
Asset or Nothing
In contrast this type of trade is directly associated to the movement of the asset and the price it ends up with.. If you predict it will rise in price and it does, you will receive the agreed payout. For example, you purchase an option which says the share price of a specific asset will reach $20. If it actually reaches $30 you will get $30, if, however, it only reaches $19 you will get nothing.
Why Not To Buy Stocks Directly Instead Of Investing Into Binary Options?
Binary options are unlikely to pay the high rate of return which you can get on the stock market if you hit the right share. However, they are also a lot less risky. You always know the maximum amount of funds you can lose; this will never be more than you invested. Purchasing actually shares which crash in price can leave you seriously out of pocket, you may only lose you initial investment but this is complicated by the potential value and even the potential for the shares to increase in value again.
Shares also need to be purchased in fairly large quantities to obtain a reasonable rate of return, this requires a significant amount of funds and it may be difficult to get these funds back at short notice. In contrast this type of investment requires far less capital and always has an agreed timescale; at the end of which you will get the return on your investment, providing you are in the money.
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