Binary options go by many names: bet options, digital options, and fixed return options. Many people are familiar with the term but do not know precisely what it means.
As of today, there are numerous binary options brokers available. Each with its peculiar benefits. It’s important to pick the top binary options brokers to experience a seamless trading experience. If you’d like to check out the top 10 binary brokers in 2022, visit https://www.binaryoptions.com/broker/.
This article will cover binary options, the advantages, disadvantages, and everything else you need to know.
What Is a Binary Option?
A binary option is a type of options contract that offers a trader two options “buy/sell.” It’s called a binary option because the trade only has two outcomes like a binary number system. Traders study the market and decide whether a market will be above a certain price point known as the strike price. If they think it will be, they buy. If not, they sell.
How Exactly Do Binary Options Work
Binary options work as easily as reading the alphabet. It involves buying and selling. A trade can run from minutes to weeks and even months. Each binary contract shows you the amount you stand to gain or lose. If the trade ends in your favor, you’ll receive a payout. If it doesn’t, then you receive nothing. Your profit equals the payout minus the amount used to open the trade.
To further illustrate, let’s give a practical example. A trader speculated that the stocks of a particular company would be above $950 in a week. He then placed a trade of $15 with a potential payout of $90. When the trade expired a week later, the stocks of the company were above $950, and the trader received a payout of $90. The trader’s profit therefore is $90 – $15 = $75. If the trade had expired with the stock price below $950, the trader would have lost his $15.
Like in forex and other markets, bots have been introduced in binary options to perform automated trading. The bots are software that scan markets to identify potentially profitable trades to enter on behalf of traders. They are usually programmed to make decisions based on algorithms or copy trading.
Key Features of Binary Option
No matter the broker you choose, every binary option has three key features:
Underlying Market/Asset
An underlying market is a market or asset on which a derivative is based. Depending on the platform, this can market like forex or commodities such as gold and crude oil.
Strike Price
The strike price is the price point that determines the outcome of a trade. To place a trade, you must decide if the underlying market or asset will be above or below the strike point.
Expiration Time
Every binary option trade has an expiration time. You can decide which options you want to trade based on your preference. You can select options that last minutes, days, weeks, or months.
Binary Options Regulations
Binary options are legal to trade in many places, but be careful to avoid fraudulent platforms. To be safe, ensure that the platform you decide to trade on is duly registered in your country and upholds best practices in the industry. If you must use offshore platforms, only trade with reputable companies that are internationally recognized.
Advantages of Binary Options
Here are some advantages of binary options:
High Return on Investment
The primary reason binary options are growing in popularity is because of their high return on investment. On average, traders earn around 70% ROI; some are as high as 90%.
Simplicity
Binary options have only two possible outcomes. Traders don’t have to bother with a lot of analysis and complexities that usually come into play in other forms of trading.
Known Risk and Reward
From the moment traders enter a trade, they are aware of the potential risks and rewards. It doesn’t matter how high or low a price goes; as long as it stays within your predicted zone, you will always win.
Disadvantages of Binary Options
Here are some disadvantages of binary options:
Losses are Total
In binary trading, it’s either you win or lose. If a trade goes in your favor, then you win. If it doesn’t, you will lose all the money you invested. This can dwindle your capital fast, especially if you’re making big trades.
Regulation
Binary options aren’t properly regulated like other types of trading which leaves room for scammers and unscrupulous trading platforms to take advantage of traders. Before trading, ensure that the broker you intend to use is duly registered and regulated.
Unavailable in Several Locations
The sale of binary options to retail investors has been banned throughout Europe by the European Securities and Markets Authority (ESMA). In other locations where it is available, the use of offshore trading brokers is prohibited to protect citizens from scams.
Final Thoughts
Like other types of trading, trading binary options can be profitable when done right. Do research before trusting a broker with your hard-earned cash. And always keep in mind that all forms of trading are risky. Only stake what you can afford to lose.
