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How to Trade Binary Options

Trading has become more popular in the past few years for various reasons. Mobile devices make it very easy to access trading platforms from wherever you are. What’s more, there are plenty of information sources and guides to get you started and help you progress from beginner to regular trader. In this article, we will introduce a popular (but somewhat exotic) form of financial trading.

Binary Options: Basics

A binary option is a non-standard financial option with two ways of payoff: a fixed monetary amount or nothing at all. They are also known as all-or-nothing, digital options, and fixed return.

There are two types of binary options: cash-or-nothing and asset-or-nothing. While the former returns a fixed amount upon expiration in the market, the latter pays according to the value of the underlying security.

Before you start trading, you should have a working understanding of the nature of this financial practice. To grasp the nuances of binary option trading successfully, you do not need to have comprehensive knowledge of finance, but some context is always helpful to avoid making rookie mistakes.

A binary option is always related to an asset whose price can fluctuate over time due to various factors in the international markets.

The principle of the transaction in the binary options market is quite simple:

  • 1 Launch the trading platform;
  • 2 Choose the type of option;
  • 3 Choose a tradable asset;
  • 4 Set the expiration date of the option;
  • 5 Invest any amount at your discretion;
  • 6 Make a forecast of the direction in which the value of the asset will go at the time of the expiration of the option;
  • 7 Buy contract.

Binary Options Trading: Simple Example

Suppose at 12:00 you buy a binary option at $50 that expires in 30 minutes. The bid is worth $47.50, while the offer is set at $50. In other words, you pay $50 to buy the option, but if you were to sell it immediately afterwards, you would receive just $47.50. You would lose $2.50 in the process.

Now, the binary option is based on an underlying asset. Suppose this asset’s price at the time you purchase the option is $1,000. When the binary option expires, at 12:30, there are two possibilities: the price could have risen or fallen.

If the price is above $1,000 at the time of expiry, your binary option is worth $100 (by default in the USA). This means you would be making a profit of $100 - $50 = $50 usually referred to as being “in the money”. There are fees to consider in a real case associated with the platform you use for trading.

On the other hand, if the asset price is below $1,000, you are “out of the money”. In this case, the expires at $0 (by default in the USA). Therefore, you lose the $50 you paid for the binary option in the trade.

Note that the factors used here (0% and 100%) are simply the defaults of the United States. There are other kinds of arrangements possible by the broker, such as 80% in-the-money rewards and 5% out-of-the-money rewards. Furthermore, other countries might have different defaults.

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