A Beginner’s Guide To Binary Options
Posted on September 11, 2017
Are you looking for an uncomplicated investment opportunity? If so, you should consider binary options. They might sound complicated, but they are actually quite simple. They are also a superb alternative to trade stock indices, currencies and commodities, even during an uncertain economic climate. Unsure how they work? Read our helpful beginner’s guide.
What are Binary Options?
Binary options are basically projections on an outcome. For example, you can trade on the US dollar falling, a disappointing unemployment report, or a rising S&P 500. Many people will, therefore, have knowledge of both the market and or an industry, as their informed decision can provide a financial return.
What are the Risks?
There is a limited risk, as you will know exactly how much you will either win or lose before you commit to a trade. You can, therefore, be proven right with your projection to receive a cash return, or you could lose the investment due to a shift in the strike price. You will also have an option to close a position early, which will allow you to lock in a profit or minimize a potential loss. It is therefore unsurprising that many traders are turning to binary options, as the potential loss or reward is known in advance, so you can make a trade that complements your budget.
Volatile market conditions will also not affect a person’s opportunity to trade an outcome. So, even in the toughest of economic climates, you can trade an outcome of receiving a potential return on investment. It is, therefore, a unique and interesting trading option that provides upfront payouts and risks.
How Do Binary Options Work?
Similar to any other trades, there is always a buyer and a seller in a binary option. The exchange will, therefore, match the buyers and sellers for each trade.
The process is rather simple. For instance, if you believe the price of gold will rise above $1,200 by 2pm tomorrow, you could buy a binary option, which could provide a return on investment if it was above $1,200 by 2pm. However, if you didn’t think gold would be above $1,200 by that time, you could sell the binary option.
However, a trader would not be buying into a gold futures contract. The process requires you to simply make a prediction on a trading price level for the gold futures at an expiration. The binary trade cost will be dependent on the gold futures price in comparison to both the strike price and expiration time.
The Binary Trading Price Range
It is also beneficial to pay close attention to the binary trading price range, which will fluctuate between $0 to $100, which provides traders with a probability. For instance, if a binary price were approaching the 100 mark, the probability would be in the buyer’s favour, while the seller would have a low probability. While close to 0 would provide a higher probability for the sell and a lower probability for a buyer.
The binary trade price will also be the equivalent of the buyer’s trade probability. For instance, if you think there might be a 40% likelihood the gold will exceed $1200, you would be wise to pay $40 for a binary options contract. As a result, the counterparty would pay $60 for the contract, as they will predict there is a 60% chance that the gold will not exceed £1200. This means the maximum profit you will yield is $60, and the maximum loss will be $40. While the opposite will be the case for the person on the other side of the trade.
A Statistical Advantage
A successful binary option is often dependent on gaining an edge for a trade. You may, therefore, have an improved statistical advantage over a seller if a trade price is more than 50. This means a buyer will need to provide more collateral in comparison to the seller, as you will have an increased probability. While a trade price below 50 will provide the seller with an advantage. What happens when the trade price is exactly 50? The probability will be reflected by the trade price, which will be the same figure for both the buyer and seller.
How to Gain an Edge
Only fools rush into making binary options. Don’t take a shot in the dark when it comes to a trade. All decisions must be based on marketing knowledge or insight, which will allow you to make an informed choice before you commit to a trade.
We, therefore, recommend learning more about the industry, so you are 100% confident you are making the right decision for your finances. Read the Stern Options Blog to learn more about binary options, as you can gain the knowledge you need to reap the rewards.
How Long Do I Have to Trade?
Binary options can range from one minute to ten months so that you can select a short or long period of time. It is, therefore, possible to receive a return on an investment within a few minutes, days or months, depending on the contract option you choose. It can, therefore, provide a financial return at a faster rate in comparison to traditional investments, which can often take many months or years to provide a profit.
Binary options don’t need to be complex. As you have read, they are actually rather simple to understand. Now you know the basics, it’s time to think carefully about a trade, so you can maximize your finances. Remember to pay close attention to any political issues or economic developments, which could impact an outcome at a fast rate. Always make an informed decision, and remember you will can choose to close a position early to reduce a loss or secure a profit.
Have you enjoyed success with binary options? Do you have any tried and tested methods that you swear by? We would love to read your advice in the comment section. Log in to share your helpful advice.