What are Binary Options and How Do They Work?

Binary trading options are seen as a few ways to trade in a crystal-clear manner. This is because the one engaging in such trading knows precisely how much they will lose or bank on a specific trade.

Just as their name implies, binary refers to trade can be either yes (won) or no (lost). No half-measures or more/less profit exist – this type of trading can bring either profit or nothing. Due to the certainty of risks of this type of trading, many people want to engage in and try it – however, it’s not practiced in every country!

Luckily for traders, there are many binary option brokers that accept US clients – since this type of trading is relatively scarce throughout the states. But, if you want to know more information about this, here are the essentials!

The Basics

Naturally, such options are instruments within financial trading. Their primary purpose is to reduce complex trading to straightforward procedures – as simple as yes and no answers.

The one that engages in such trading bets on the status of the market at a particular time. They try to predict if it will be above a defined point – case in which they buy. If they think it won’t go above that defined point, they’ll sell.

What’s the main point of such trading? Well, the fact that people don’t interact with any underlying/minor assets. On the contrary, instead of putting their money on and trying to figure the latter, they beton the market itself. No shares are bought in this type of contract.

How do They Work?

This particular trading option works based on several key elements that can be found within a primary market. Even though such a contract is not drastically affected by underlying assets, the latter still has to be considered.

As such:

  • The main element is the underlying portion of the market or, in other words, the market chose to trade on. According to one’s knowledge, choosing it allows for better, more accurate predictions in terms of price/value – thus successful contracts.
  • The second element is known as the strike price. It is the only value that one will have to determine in such a contract. After choosing it, they’ll bet on the market’s position regarding a defined matter. It is the core of this particular type of contract.
  • Last but not least, traders must also consider contract duration/expiration. This is taken into account by traders who want quick traders or those who are patient enough to engage longer. Some contracts are designed to last around a maximum of five minutes, whereas some can go on for as long as an entire week.

Since we mentioned underlying markets, it’s also essential to realize that not all markets out there come with this type of trading option. This type of contract can be made mainly within the Forex and stock indices markets. 

Binary Options Peculiarities

Now, let’s move on to the interesting and unique bits of this financial instrument.

  • As some of you might already know, such options can only occur between two pre-defined prices, namely between zero and one hundred dollars. This allows people to decide exactly how much of their funds can put on the table.
  • Upon entering a contract, the user will be shown exactly the maximum value they can win and the maximum value they can lose. In short, you’re fully informed of the possible results of your trade.
  • Ultimately, these two peculiarities boil down to a capped risk. If you win the contract, you’ll receive the maximum value minus what you paid to enter the contract. If you lose, you don’t receive anything and lose only the registration price.
  • Moreover, exit before duration completion is also possible within such contracts. One could place a subsequent order that will close their current position. This helps uncertain traders limit their eventual losses and, naturally, lock in any profits. 

Despite all of the aforementioned, don’t think of this instrument as a safer alternative to conventional trading. One wrong step and you can say goodbye to quite a lot of funds, primarily if you engaged with a market that you’re not familiar with.

The Bottom Line

Overall, this type of trading is not difficult to comprehend and, naturally, easy to interact with. Even beginners can open such contracts as soon as they finish registering themselves with a certain broker.

When it comes to who can benefit from such trading, it’s clear that this financial instrument is designed for people that want to limit their risks and have more control over their capital.

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