Question Time – What Are Binary Options?
Binary options are a type of option that can pay out a return on your investment based on only two possible outcomes either by a fixed monetary amount or nothing at all.
The actual word binary itself means to have two parts and if you know your computers and IT then those two parts are zeros and ones. In the financial world the binary is to predict either a call or a Put.
You could try to determine if the price of an asset will rise this is known as the call option investment or you could try to predict that the price of the asset will fall and this type of investment is known as the put option. You are of course making a bet against perhaps gold, silver, oil, indices, forex currency pairs, commodities and stocks.
If a binary options trader believes that the market is rising and they would purchase a call if however the trader believes the market may be falling you would buy a put. For a call to make money the price must be above the price that you place the call at the time of expiry of the investment. So you might want to set the price and five seconds 30 seconds or a minute or more and depending on the price and the time factor will depend on your final investment return. The strike price the expiry time as well as the payout and risk will all be made clear at the commencement of the trade.
So essentially you are betting or wagering that the future price in X number of minutes or seconds will be higher than the original purchase price.
Some brokers will allow a range binary option which will allow a trader to select a price range that the actual commodity will trade within until expiry. Should the price stay within that range then a payout will be due to the trader, if unfortunately the price drifts out of the specified range than any investment on that deal would be lost.
If you’re really lucky some brokers will allow binary option traders to exit their trades prior to the expiry time of the trade. When exiting early you would generally lose some of your investment but not all of it.
It is not dissimilar to roulette at a casino! You are simply betting on red or black and the rough time that the ball will stop. Except in binary options it is normally red and green and you may have the advantage at least of knowing which way the markets might turn.
In forthcoming articles at Forexbrokerclub.com we will be exploring the ins and outs and dos and don’ts of binary option trading.