New to digital trading? Interested to learn how to trade binary options like a professional and earn money from the comfort of your home? Read on our extensive guide to trading binary options to become an expert in this lucrative niche.Ready? Let’s get started!
- What are Binary Options?
- How to Trade Binary Options?
- What are High and Low Binary Options?
- Other Types of Binary Options
- The Importance of Bids and Asks in Binary Options
- Binary Options Time Frames
- Benefits of Trading Binary Options
What are Binary Options?
Binary Options, or as some call them Digital Options, are trading instruments with fixed return. These options are based on two outcomes, whether an asset’s price will increase or decrease. If a binary option expires “in the money” traders receive a predetermined payout on top of their investment. On the other hand, if the option expires “out of the money” traders lose the amount they’ve invested in the trade.
These characteristics make binary options trading one of the simplest financial mechanisms you can use. Due to their simplicity, they’re currently one of the most used trading methods in the world.
Another distinctive feature of binary options is the fact that, unlike traditional options, they’re not affected by the degree of an asset’s movement. As long as you correctly predict the market’s direction and side of the strike price, you’ll win. Alternatively, if your wager is incorrect, you’ll lose the amount you’ve invested.
How to Trade Binary Options?
As we mentioned above, Binary Options enable you to trade with a fixed risk and profit. Everything is essentially narrowed down to a simple “yes” or “no” proposition. To help you visualize the trading process, here’s an example of what binary options look like:
“Will the price of oil be above $1,400 at 2:30 p.m. today?”
If you believe that the price of oil will reach this threshold, you buy the option. This is referred to as a “call” purchase. In case you predict that the oil will be below $1,400 at 2:30 p.m., you sell the option or you buy a “put”.
The typical price of a binary option falls in the range between $0.00 and $100. Another important factor, you need to take into consideration, is the bid and ask price. These two aspects determine the buying and selling price of the option. Here’s how these two work:
Let’s say that the above binary is being traded at $40.50 offer and $35.50 bid at 1:00 p.m. If you decide to buy the option at that time, you’ll need to pay $40.50. However, if you decide to sell the option you can do so for $35.50.
Let’s assume that you want to buy at $40.50. At 2:30 p.m. the price of the oil reaches the price of $1,400, so you’ve correctly predicted the movement of the asset’s cost. This situation is referred to as “in the money”. Your binary option expires and reaches the amount of $100. Your profit from this trade will be 59.50. Why? $100 minus $40.50 equals $59.50.
Now, let’s review the alternative scenario. At 2:30 p.m. the price of oil is below $1,400. In this case your option expires at $0, which means that you lose your bid of $35.50. Traders typically refer to this event as “out of the money”.
Keep in mind that the offer and bid fluctuate dynamically until an option expires. To secure a specific profit or reduce potential loss, you can close your position at any time before the expiration of the option. This can limit your winnings as well as prevent further losses.
What are Low and High Binary Options?
High and Low binary options are the most common types you’ll use in your trades. In this section of our guide to trading binary options we’ll help you understand how they work.
Let’s assume that your analysis indicates that the Dow Jones Industrial Average (DJIA) index is going to increase during the day. Although you’re not completely sure by how much, you decide to put a call on the DJIA. The current index is $1,500, so by calling you’re predicting that the price at expiry will be above this amount. As binary options are available for various time frames, you select a specific time according to your analysis. You go for an option with a $1,500 strike price that expires within 30 minutes.
This option will pay you 70% in case the DJIA is above $1,500 after half an hour. On the other hand, if your prediction is incorrect and the price remains below $1,500, you’ll lose your investment.
With binary options, you can invest as much money as you want. The only investment limitations you need to comply with, are the ones set by your broker. Typically, binary options trading providers define a minimum and maximum amount for their trades in the range from $10 to $10,000. (This information can be acquired from your broker’s website.)
Let’s say that you want to invest $100 in the call. The only factor which determines whether you win or lose is the DJIA price at the expiry. 30 minutes later your prediction turns out to be correct. The price of the DJIA index is $1,550. Therefore, you earn $70 (which translates to 70% out of $100) and keep your investment of $100. If the price has expired below the predicted level, you would lose your $100.
Don’t forget that there’s a third possible case – if the price expires exactly at the strike. In such scenarios you’ll get your investment back without gaining anything from the trade. Keep in mind that these rules are usually broker-specific so make sure to check them upon sign up.
Other Types of Binary Options
Although the High and Low is the most commonly used and offered binary option, there’re several other types which you can use in your trades. These include “One Touch” and “Range” options.
One Touch Options
One touch options allow traders to win a profit immediately after a price touches a specified level. If this happens before expiry, you’ll be in the money. Various targets are available above and below the current price of the asset, so you can pick the one you believe will be reached before expiry.
Range options enable you to choose a specific range within which an asset’s price will be until the binary expires. As long as the price stays within the predefined range, you’ll be in the money. If the prices fluctuates out of the specified range, you’ll lose the investment.
With the growth of the binary options trading market, more and more brokers are offering innovative binary option products to their traders. Some options offer extremely high payouts (more than 300%), while others rely on lower payout percentage and increased trading flexibility. The best thing about these new options is that regardless of their features, the information about your risk and reward is always available at their outset.
The Importance of Bids and Asks in Binary Options
Our guide to trading binary options continues with the bid and ask. These’re two of the main indications you’ll rely on while trading. When analyzed properly, they can help you yield higher profits. Let’s take a closer look at what they mean and how to use them in binary options trading.
The bid and ask are determined entirely by traders. They essentially show you how others assess the probability of a binary being true or false. For example, if the bid and ask are at 70 and 80, this means that traders predict that the option will be in the money. In case the bid and ask are fluctuating around 50, traders aren’t sure whether the binary will expire at $0 or $100.
If the bid and ask are 15 and 20 respectively, you can safely say that there’s a higher chance that the outcome of the option will be “no”. Those who buy such options are likely to receive a greater gain for a smaller risk, while the traders selling the option are likely to get a smaller profit for a large risk.
Binary Options Time Frames
With binary options you can choose from a multitude of available time frames. For example, most brokers provide options that expire hourly, daily, weekly or even monthly.
Hourly Options allow traders to execute quick trades even in quiet market conditions. Through these short-period trades, you can easily attain an established return, as long as you can correctly predict the direction of an asset’s movement over that period of time.
Daily options typically expire at the end of the trading day. They are generally used by more experienced traders who’re trying to affect the direction of other assets, to boost their chance of winning.
These expire at the end of the trading week. Weekly Options are traded mainly by swing traders during the trading week. It’s common to see day traders taking part in weekly options as well. This usually happens on Friday, near the expiration of the binary.
Benefits of Trading Binary Options
Thanks to their flexibility and simplicity Binary Options have become one of the sensations in online trading in the last few years. Let’s sum up what makes these options a preferred choice for so many traders out there.
Binary options require little to no financial knowledge to start using them. Thanks to their simplified model, literally anyone can trade them. All you have to do to get started is set an account with one of the many reputable brokers, choose an asset, amount, direction and expiry time and you’re good to go.
Binary options require a smaller investment than traditional options. This means that you can trade safely without risking huge financial losses. These options allow you to precisely calculate your risk before you decide to trade.
The ability to trade smaller amounts of money, make binaries an affordable and convenient way of trading. You can trade binary options for $10, $1,000 or $10,000. It’s up to you. This is especially beneficial for novice traders, as they can practice their skills with minimal investments.
Another distinctive feature of binary options is their fast expiry times. A binary expiration can range from 1 minute to 1 month. The ability to quickly trade combined with the high potential return rates make binaries an excellent tool for trading.