In this Article we will be delving into the world of binary options trading, providing you with the basic foundation of understanding from which you will build upon in other Articles that follow.
Investing and profiting from stock market trading is something that many of us would like to do, but there are barriers that prevent the average layperson from doing this. The first barrier is capital. Buying stocks is not cheap. More pointedly, buying sufficient amounts of stocks to make a decent return is not cheap.
The second barrier is accessibility. That is to say that even if you have the money to buy stocks, the process of acquiring them is not so simple. Many people would have loved to buy some shares in Twitter when they went public, but the chances of them (i.e., laypeople) being able to do so are essentially zero.
The third barrier is knowledge of the financial markets. Knowing when to buy and when to sell is not as easy as it sounds and you have to rely on brokers and intermediaries to manage your portfolios. The execution of such trades is not only out of your hands in most cases, but it also costs you money in fees and commissions.
Binary options trading removes many of the barriers associated with traditional trading, the entry costs are low, you can trade options on hundreds of underlying assets, and you have total control of when you trade and what you trade.
To put it simply, the world of traditional trading is rigid, slow, and complex, whereas the world of binary options trading is flexible, fast, and easy.
What is binary option trading?
Binary option trading is a type of financial instrument whereby you make predictions about the future price of market-traded underlying assets, such as commodities, stocks, indices, and currencies. With binary options, you are simply predicting if the price of an asset will rise above or fall below a certain point, within a set timeframe.
Binary option trading differs from traditional trading in a number of ways, but most notably in the following areas:
- When trading binary options you are not purchasing physical stock or ownership of a company.
- Returns are fixed and pre-determined, so you know exactly how much profit you will make before you commence trading.
- Trades are short, normally lasting from between 10 minutes to an hour, although there are also different binary option products, such as One-Touch, that allow you to take long positions on an underlying asset.
- With binary options you can profit regardless of whether an underlying asset is rising or falling in price.
- With binary options there are only two possible outcomes: your prediction is either correct, whereby you make a profit, or your prediction is incorrect whereby you lose all or most of your initial investment.
How do you trade binary options?
The major appeal of binary options apart from the high returns, which can be over 70%, is that it is accessible to anyone who wants to trade. You don’t have to be a Wall Street tycoon to profit from options trading nor do you need massive amounts of capital to get started.
The trading process itself is straightforward and only requires that you make one of two choices: you either “Call” or “Put”. You select a “Call” option when you predict that the price of an underlying asset will finish above a certain price and you select a “Put” option when you predict an underlying asset will finish below a certain price.
The price that we are referring to is known as the “Strike Price”. This is the price that an underlying asset holds when you commence trading. If the price of the underlying asset is above or below the “Strike Price” when the trade ends (“Expires”), you will make a profit and be “in the money” or you will lose your investment and be “out of the money” depending on the prediction you made.
Here’s an example using a Twitter Option. You may see that the price of Twitter stock has been rising sharply over the last hour. Through technical analysis (we will cover this in a later section of this Article), however, you have determined the stock price will start to fall. When you think the price has gone as high as it will go, you can take a “Put” option with a “Strike Price” of $37.28 and an expiry time of 1 hour. After 1 hour, when the option “Expires”, if the price of the Twitter stock option is below $37.28 you will be in the money.
Jargon associated with binary options
“Call Option” – Predicts that an option will expire above the strike price
“Put Option” – Predicts that an option will expire below the strike price
“Strike Price” – The price an underlying asset holds when you commence trading
“Expiry Time” – This is the length of time that an option is open to trade. Expiry times can range from 60 seconds to 1 week
“Underlying Asset” – The underlying asset is the financial instrument (e.g., stock, future, commodity, currency, index) on which a derivative’s price is based.
“In The Money” – A positive outcome (you make a profit) when a trade expires
“Out Of The Money” – A negative outcome (you lost your investment) when the trade expires