Binary options are one of the most interesting and often confusing ways to trade. The reason for this is because they often take on an element of speculative trading, luck, as well as an in-depth understanding of the way stock exchange and currency markets work. Strictly speaking, binary options are a type of trading option where there are only two possible outcomes at the end of the day. The only payoff options available in binary options are either the full-payout or nothing, hence the reference to the word “binary”.
In order to understand how binary options work, look at the following example: a binary option of a company’s stock can be purchased struck at $50 with a potential payoff of $500. What happens is that at the time of maturity of the option, if the stocks of the company are trading at or above $50, $500 is paid to the person who bought the binary options. If the stock is trading below the stipulated price, then the money is lost.
Usually, binary options come in two options: Asset-or-nothing binaries and cash-or-nothing binaries. As you may have guessed from the names, the asset-or-nothing binaries pay the value of a security agreed upon at the time of purchase of the binary options and the cash-or-nothing binaries payout some fixed and agreed-upon amount of money, if the maturity is reached “in-the-money”.
Trading binary options
One of the most important things (apart from selecting a suitable broker before taking on binary options) is learning all the terms that are used in this field. Sadly, a huge portion of those who decide to enter into binary options trading do not take the time to learn the terms and tools of the trade. The end result of this is that they end up frustrated and do not earn as much as they should have. This happens because they ignored the fundamental principles of binary option trading.
Unless you are looking to venture into other areas of trading or you are looking to become an absolute professional on binary trading, there is often no need to have an in-depth understanding of all of the various charts, graphs, trends, and other aspects. You ought to have enough understanding and experience in binary trading to be able to make sense of what is going on in the marketplace. You also ought to have an understanding of business and political factors that may affect the prices of stocks and other options to ensure that you do not lose money.
Without further ado, here is a list of some of the most common terms you will hear or come across during your binary options trading:
1. Asset – this is something that you will be trading for. It may be something physical, a currency pair, or actual cash.
2. Broker – a person or entity that hosts the trading platforms you trade on.
3. Call option – this is a type of binary option that is paid out, once the unit price of the asset rises above the strike price at closing time.
4. Put option – this is the opposite of the call option, and it is a type of binary option that is paid out once the unit price of the asset falls below the strike price at expiration.
5. Strike price – this is the price of an asset at the time that a binary option matures.
6. Currency pair – this is a FOREX (Foreign Exchange) value that is calculated by comparing the value of one currency with the value of another.
7. Expiration – this is the time at which the binary option expires.
8. In the money – this simply describes a binary option that bears profits for a trader. For a call option to be “in the money”, the price of the asset must be greater than the strike price at expiration. For a put option to be in the money, the price of the asset must be lower than the strike price at expiration.
9. Out of the money – this phrase describes a binary option that ends in a loss for a trader. For a call option to be “out of the money”, the price of the asset must be lower than the strike price at expiration. On the same note, for a put option to be out of the money, the price of the asset must be higher than the strike price at expiration. As you can see, “out of the money” is the direct opposite of “in the money”.
10. Trading minimum – this is an amount of money that is usually set by brokers and is the least amount of money required for one to execute a binary option.
There are many more terms as far as binary options trading and execution is concerned, but these are the most common and most important.
How to trade binary options
Trading binary options can be looked at from two angles: one can decide to look at it as something that is profitable by way of luck or as science that requires careful consideration and calculations to be profitable. Remember the charts, graphs, and other technical aspects we mentioned earlier on? They come into play at this point. There are those who decide to trade in binary options and depend on luck for their options to be in the money – that is one of the worst ways to do binary trading.
At the other end of that spectrum, there are those who take binary options as a science, which requires careful consideration, tools, calculations, and guesswork. Those who often use graphs and information from a range of sources to make their conclusions, will often plot graphs and have their ears on the ground when it comes to business and political matters. They are always on the forefront of what is happening in the business world and other places that may affect the prices of stocks and other assets. Staying ahead of the information is one of the best ways to ensure that one is making the right call or put options and increasing the chances of their binary options expiring in the money.
For one to trade in binary option, one needs to firstly find a broker. There are a lots of legitimate, registered brokers, as well as unscrupulous brokers, who are only looking for ways to take away your money. It is up to the trader to verify the authenticity of a broker, their history, and whether or not they are the perfect broker for them.
After registering with a broker, the next thing to do is to buy some binary options. Before doing so however, one has to choose the stock or asset they would like to execute their options on and what option – whether a call or a put – they need to execute on their binary options.
After that, it is all a matter of waiting for the expiration date. If the executed option is right, then the trader makes some money. In order to ensure that you are executing the right option all the time, one of the most important things to do is to understand the trends of the companies’ whose stocks and/or assets you would like to place binary options on. This is most often done through looking at graphs that display the history of the available stock and asset options. Knowing how to read, interpret, and work with these graphs and other instruments is paramount, if you are looking to become better at binary options trading and making as much profit as you can.
Benefits of binary options trading
One of the biggest criticisms for binary options trading is that it is a primitive form of trading. This is because, in most cases, there is no need of an in-depth understanding of business models, environments and other factors that would come into play, if one was trading on a different platform. There is also the thinking that since binary options trading takes a relatively short amount of time to reach expiration, it is not real investing. It is interesting to note that these criticism often point out the strengths of binary options trading.
For one, if one has an understanding of how markets, stocks, and other options will be looking like in the next few hours or days, binary options are a very good way of making money fast. This is especially true for binary options and FOREX currency couples that mature and expire in a few hours. The upside to this is that there is no limit on how much money one could make with binary options.
Secondly, binary options trading is one of the best ways to learn to assess risks and opportunities – a skill that is essential if one is looking to expand their business portfolio. Remember, almost all investment options require you to learn to assess and manage risks. By delving into a highly risky, unpredictable world of binary options, those looking to use this as a stepping stone to other money-making ventures can take away essential lessons on how the business and the investment world functions.
Lastly, binary options trading can be a good way to dip one or two toes into the water, so to speak, for those who are new to trading, stocks, investments, and similar areas. Since the risks associated with binary trading are not often as high as those found in other trading options, those willing to learn by doing can use binary options trading for this very purpose. The best thing is that there is a huge community of traders willing to hold your hand for those first trades. For this very reason, those new to binary options trading ought not to worry; those who came before you are here to answer any questions.
Becoming an expert binary options trader
If you are serious about making money through binary options, you have no choice but to get better at it. Those who did this in the past, realized the importance of experience and took steps to ensure that they receive the maximum amount of benefits from binary options.
One of the best ways to get better at binary options trading is simply through doing it. There is no better way to get a complete feel of the binary options world than to immerse yourself in it. One of the best ways to learn by doing is by finding a mentor in the field. Someone you can relate to, who has been trading for a while, and who has been successful at it. They will show you the ropes and help you launch your own binary options empire.
As stated earlier, learning the tools of the trade cannot be stressed enough. Learning how to use and take advantage of all or most of these tools is the difference between those who build empires and those who complain about binary options not working. Learn to draw, read, and work with graphs, charts, reports, and all other materials that are used to help with your options. Remember that in order to make a profit, you have to make the right calls or puts. Having an intimate understanding of the tools will help you make these decisions.
Lastly, you have to have a business mind. It has been shown, that those who are good at binary options are usually business-minded and make business-like decisions. In order for you to enter this elite league of binary options extraordinary performers, you have to start thinking like them. The best way to learn to think like them, apart from mentorship, is practicing, analyzing situations, information, and the options you may have on your table, even when it does not translate into profits for you, it is one of the best ways to learn how to make business decisions.
Binary options trading, done the right way, can be one of the most profitable ways to trade. The most important thing to keep in mind is that the more you do it, the better you get at it. It is also paramount to remember that learning the tools of the trade will go a long way to ensure that you are a successful binary options trader.