What are Binary Options?

Published by Thomas Herold in Trading

'Binary Options' is explained in detail and with examples in the Trading edition of the Herold Financial Dictionary, which you can get from Amazon in Ebook or Paperback edition.

Binary Options are a fairly new means of trading on the financial markets in the United States. They became a legal vehicle within the U.S. only back in 2008. Since then, they have rapidly evolved into what is now one of the quickest and simplest means of trading. These options are different from most other forms of trading since participants do not assume ownership of anything. Instead, they are simply trying to forecast the price direction of the asset that underlies the binary trade.

The most basic form of such binary options involves only two directions to potentially correctly predict. Will the underlying security go up or down is the only question traders must attempt to answer in this scenario. These are “all or nothing” trades without any confusing grey area in the middle. It makes them far easier to understand. Once traders arrive at their final conclusion on the price direction, they can punch in the security and see the percentage return on that given scenario if they are right before actually committing to the trade. It means traders know exactly how much time they have for the trade to work, what the maximum profit point is, and the maximum (total invested) loss amount could be. The simplicity of this idea appeals to countless traders.

Binary options permit trading on any of the significant cross currency pairs, stock market indices, many individual stocks, and commodities like gold and silver. This means that all of these various instruments, ranging from the British Pound Sterling currency versus the U.S. Dollar, to Apple stock, to gold futures can all be speculated on from a single unified and cohesive platform. It eliminates the need to switch back and forth between laptops or computer screens while trading internationally without having to switch from one broker to the next. This is especially true since a great number of the top binary options brokers have a wide range of stock market indices and individual stocks from the U.S., Europe, and Asia. This permits international traders to utilize their platforms without difficulties or hindrances. It makes these brokers a one-stop shop for binary options trades.

It is important to remember with these forms of option trades that every trade will entail a specific time line that the trader must pay careful attention to in order to profit. They may be set for shorter or longer time periods depending on the markets and the individual instrument involved. For those who resent having their funds committed for long, there are 5 minute options and even 60 second time frame trades available. Those who prefer to have more time for the trade to pan out are able to enter into trades with several hours and even days. These expirations can be changed as often as the trader wishes until the trade is executed. At this point, the time restriction becomes immutably set. Most binary options do not permit the traders to sell out early either at a partial profit or loss. Instead, they have to wait till the option expiration to realize their total gain or loss.

Three different kinds of binary options are available. These are the ones described above, as a basic straight call or put. Will the price be up or down at time of expiration? The second type is known as the one touch trade. In this binary option, traders select a target price before executing and committing to the trade. Should the underlying asset “touch” that price or surpass it at any point in the trade’s life time, even just one time, then the investment is considered to be a profitable one. The final type is called a boundary trade. In this scenario trade, the broker supplies a range of prices to the traders. The traders have to decide if the price will fall within or without the provided range at expiration.

There are also several creative variations on these three kinds of trades along with a few exotic versions that feature higher payoffs of even 300 percent. Some of these are one touch trades with far-away target prices. While the odds of the underlying asset achieving such a price are considerably lower than with a closer target, the potential returns can be hundreds of percent if the traders are in fact correct in their prediction by expiration time.

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The term 'Binary Options' is included in the Trading edition of the Herold Financial Dictionary, which you can get from Amazon in Ebook or Paperback edition.