What are binary options exactly? A binary option is a relatively new, simple investment vehicle allowing traders to bet on price behaviors in underlying assets. It differs from a traditional stock or stock option purchase in that the investment amount is fixed, the payout is fixed, and the price action (the win/loss trigger) acts within certain, simple parameters. Binary options are also known as all-or-nothing options.
Binary means ‘Using or denoting a system of numerical notation that has 2 rather than 10 as a base.’ An example of a binary event is an answer to yes or no, your laptop is on or off, and in the case of binary options, up or down.
An Option is ‘a thing that is or may be chosen’. In traditional options trading, an option is the right, but not the obligation, to buy or sell an underlying stock, commodity, currency, index or debt at a specified price during a specified period of time. The specified price is the strike price, and the end of the period of time is the expiry. Trading options are a simple idea, but complicated in practice. You can do many things with a traded option, including for example to exercise it and buy or sell the underlying asset. There’s a lot of complexity available to the trader in options, making them a great tool for advanced or professional traders but not so much for amateurs.
Binary Options put the idea of option trading together with a simple buy or sell switch. They carry none of the more complicated ideas and are triggered by a certain price action in a certain time window. As a trader, you cannot buy or sell the underlying asset to a binary options trade, nor can someone force you to do so if you had given the option to another trader. It’s a simpler way of trading and many people are taking notice of the opportunity to invest for high returns in a more understandable way.
Here’s an example Binary Options trade.
It’s 09:30 on the US east coast. You have been watching the news on tech stocks, and Google Inc. (GOOG) has made a press release the night before that makes you believe that they will close up for the day since investors generally react well to this sort of announcement. You log-in to your binary options broker and see the after hours price on GOOG is slightly up from last close, but not a lot. You purchase a binary option End-Of-Day call on GOOG for $500 for 75% return with 2 clicks of your mouse.
What’s your risk? It’s $500, no more and no less.
What’s your expected ROI? It’s $375 profit on the trade.
When will the option expire? At end of trading today.
Can binary options be risky investments? Absolutely! Don’t let anyone tell you differently. However, their risks are fixed and not limitless like traditional options, and you know that before you trade them. Therefore you can make trades with amounts of money knowing that you will either win or lose. It’s not open ended like stocks or traditional options. You know the time frame, you know what you’ll profit and you know what you’ll lose. A smart investor will manage these variables.
At WhatAreBinaryOptions.org we’re looking to inform investors so they can make intelligent decisions, not only on what to trade but who to trade with. Binary Options investing is not for everyone, and we hope that helping you make better decisions will give our visitors the maximum opportunity to profit and minimize their loss.