HOW TO TRADE BINARY OPTION
Binary options trading has become increasingly popular over the last decade. Day traders in particular access these markets with ease from their computers. Another draw is that entrance requires relatively little capital. This article will delve into the basic rules of the game, how market exchanges work, and several ways to strategize for the greatest profit potential.
WHAT ARE BINARY OPTIONS
Binary options are deceptively simple to understand, making them a popular choice for low-skilled traders. The most commonly traded instrument is a high-low or fixed-return option that provides access to stocks, indices, commodities and foreign exchange. These options have a clearly-stated expiration date, time and strike price. If a trader wagers correctly on the market's direction and price at the time of expiration, he or she is paid a fixed return regardless of how much the instrument has moved since the transaction, while an incorrect wager loses the original investment.
The binary options trader buys a call when bullish on a stock, index, commodity or currency pair, or a put on those instruments when bearish. For a call to make money, the market must trade above the strike price at the expiration time. For a put to make money, the market must trade below the strike price at the expiration time. The strike price, expiration date, payout and risk are disclosed by the broker when the trade is first established. For most high-low binary options traded outside the U.S., the strike price is the current price or rate of the underlying financial product. Therefore, the trader is wagering whether the price on the expiration date will be higher or lower than the current price.
UNDERSTANDING THE RULES OF THE GAME
Know what binary option is: A binary option is based on a “yes” or “no” proposition to whether an underlying asset will be above a certain price at a specified time. If you answer yes and you are correct at the time of expiry, you win and gain the money.” If you answer no and lose, you lose the money you invested.
Recognize it's a win or lose deal: Just like rolling the dice in a game of craps, you either win the pot or lose what you put in the pot
Realize that market makers determine the bid and ask prices: Market makers – or a person or brokerage house/bank – look at many variables to decide whether they believe the proposition will be true or false and are fairly confident they’re on the winning side.
Understand you don’t own the underlying asset: Binary options trading merely involves speculation on the price of the underlying asset. It does not mean you own the asset itself. For example, when you buy a binary options contract you don’t own stock in Google or own a certain amount of gold.
Recognize the risk and reward in relation to other options trading: When trading in binary options, the gain or loss is fixed at $100 per options contract. In general options trading, the same isn’t true. But that alone doesn’t account for the difference. In options trading, one has to calculate the direction of the price as is required in binary options trading and the magnitude of the price move.
Thus in binary options trading there is more assured reward and a capped risk.
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