Binary Options 101 – The Basics of Binary Options
In a nutshell, binary options are a trade on whether an underlying asset (oil, gold etc) will go up or down over a set period of time.
When you trade binary options you are making a bet on one of two choices. Hence “binary”. One or the other, 0 or 1, up or down, in or out.
Binary Options Trading Basics – Breaking Down How Binary Options Work
The most popular binary option trade is an ‘up or down’ trade. You just predict whether it will go up or down and place your binary option bet accordingly. Trading binary options is simple by design. Anyone can do it regardless of how much experience they have trading. If you choose correctly you win money, if you choose wrong you lose money.
Let’s start with the underlying asset. This can be a stock, a commodity like oil or gold, an index or a forex currency pair.
This is the thing you are trading. Actually you are just betting whether it will do one of two things. Go Up or down. You do not include an ownership in any of the underlying assets, but rather, you are making a “bet” on which direction you think the underlying asset will move. Buying a binary option trade is just making a prediction on which way it’s going.
Most Common Underlying Assets Available For Binary Trading
- Currencies: USD/JPY
- Stocks: Google, IBM, etc..
- Commodities: Gold, Oil
- Indices: Dow Jones
Once you have chosen the underlying asset you want to trade you need to move forward and decide on the type of digital option trade you want to make.
Types of Binary Options – Different Options And Ways To Trade
Binary Options come in a few different flavors and types.
- Up Or Down – aka Digital Options – This is your standard up or down option. You decide whether the price of underlying asset will expire higher or lower at expiry. These are the most common binary options and are also called things like all or nothing binary options. You call or put, ie Up or Down.
- Range Options – Aka Boundry Options – These options allow you to predict if the price of underlying asset will expire in or out of a certain price range at expiry
- Touch Option – Trader predicts if the price of underlying asset will Touch or Not Touch the target price up until expiry. There are variations of this option include touch, no-touch, double touch.
- High Option – if the underlying asset price is ABOVE the strike price, the option is “in the money” and if so at expiry, it will expire with profit
- Low Option – if the underlying asset price is BELOW the strike price, the option is “in the money” and if so at expiry, it will expire with profit
There are two main types of binary options choices: call and put.
- A call option is used when you think the price will increase
- A put option is used when you think the price will decrease.
Key Binary Options Terms
Strike Price – the key price that drives the transaction
Expiration – the last date and time the option can be traded or exercised, after which it expires
In the money on a high option – situation in which an option’s strike price is below the current market price of the asset
Out of the money on a high option – situation in which an option’s strike price is below the current market price of the asset
How To Buy A Binary Option – How It Works
One of the most appealing things to binary option traders is that the risk and return are fixed and known up front before a trade is executed. It is also important to note that the magnitude of the underlying assets’ movement is not important in determining your return. All you care about is if the binary trade you executed expires in the money or out of the money. It does not matter if it barely squeaks into the money or if it surges into the money with plenty of room to spare, your return is the same.
- Fixed Risk – there is an amount you are willing to risk, no more and no less
- Fixed Return – there is a set amount you will make if you win your binary option trade. Magnitude of movement is not a factor
- Fixed expiration times – you can see exactly when an option expires before placing the trade button.
- Simple by design
- Anyone can trade and win
The payout is determined prior to the execution of your trade; a typical return being around 70 to 80 percent of what you risk. See our short list of reputable binary options brokers to set up your first account and make some trades. Or read through our binary options trading page to see different types of expiry times, such as the 5 minute options, 1 minute options which are growing in popularity with traders and gamblers alike.
The expiration time/ date is the moment at which your binary option is judged as to whether the price has increased or decreased from the strike price (starting amount). Whether the option finishes in the money or out of the money is judged at this time.
- If you call the option, the asset price must be higher than the strike price at the time of expiry to be in the money.
- If you put the option, the asset price must be lower than the strike price at the time of expiry to be in the money.
An in the money option will receive the original amount back plus the previously agreed upon return rate. An out of the money option will expire worthless in most cases (some brokers will credit your account back a small amount if your option expires out of the money).
Once you execute the trade, you basically wait and hope that what you predicted occurs. Depending on which option you selected you could be waiting as little as minutes or as long as a month. Different brokers offer different options and different payouts so it makes sense to do your homework on the different binary option brokers.
How To Trade Binary Options
Once you have decided that you want to trade Binary Options and you have found a broker you are satisfied with you need to set up and fund your account. We will walk through an example of the exact process used to sign up and fund a brand new account at 24Option.com, one of our favorite brokers.
- Step 1: Visit 24option.com website and create a new account
- Step 2: Fund Your Account
After entering your information and clicking ‘deposit’ you will be taken to a screen that shows your deposit was successfully made and a button that you can click to start trading.
Now that we’ve got an account created and funded, we can officially begin trading. However, I wanted to learn exactly how the trading worked and experience trading binary options myself with fun money first so I decided to contact and test out their live customer support advertised on their website.
With the demo account, I placed my first practice binary option trade. I selected a 1 touch binary option with gold as the underlying asset. Gold had to hit a price of $1708.206 for me to win the trade. The trade expired in 3 hours time roughly.
Making Your First Trade – Your Decisions
Assuming you already have a binary options trading account (get a free binary options demo account to practice), all you have to do is decide which underlying asset you want to make a trade with. You must first select an underlying asset, its time frame, and then determine whether you want a call or put option. Select which one of these choices you wish on your screen, and then type in how much you want to risk.
Binary options are catching a lot of popularity these days because they are so simple.
With just a few clicks you can enter a trade and have the profits in your account after just a few minutes. Most brokers have a similar setup on their sites, so this information will only vary slightly from site to site.
The most important thing to remember about binary option trading is that it is a very real thing with real money at risk. For this reason, you don’t want to start out investing with huge amounts of money. Start with a manageable amount and work your way up. Some sites even have demo accounts where you can make mock trades and not have to worry about risking your own money. The basics of binary options are very easy to master; it’s another thing to have a consistent winning binary options strategy.
What is an Option? a contract that gives the buyer the right, but not the obligation, to buy or sell an underlying asset at a specific price. What are Binary Options? a binary option offers a fixed return at a fixed expiration time.
Like many other investment brokers, binary options brokers sometimes will give you signup bonuses to add to your account, just for depositing with them. This is a great way to grow your trading capital and protect yourself in the event that you do end up losing money at first. These generally can be unlocked for withdrawal after a certain amount of money is risked.