One of the newest forms of trading that is getting a lot of attention from the financial world is binary options trading. Binary options are so popular because of its simplicity and its low barrier of entry for seasoned and new traders alike. Binary options trading derived its name from the binary or digital nature of the trade, such that the outcome of the trade is cash-or-nothing. Cash-or-nothing in essence means that you get paid a fixed amount of cash if you made the correct prediction of the performance of the underlying asset.
A simple example of this is when you purchase a cash-or-nothing put order of a stock struck at $50 with a binary payoff of $5000. At the maturity date, if the stock trades at or below the striking point of $50, you will get your $5000 payoff. If it trades at above $50, you will get nothing. Some trading platforms will offer you a small percentage of rebates even if you made the wrong call.
This predictability makes binary options trading easier to grasp for some and considered safer for the others as all the outcome of a particular trade can be accounted for at the time of trade placement.
Another major difference between binary options trading and traditional trading is that unlike traditional trading, binary options traders do not own the underlying asset of the trade. Binary options trader is only trading based on the performance of the asset in a fixed window of time. Therefore, binary options traders generally do not need the thorough knowledge of the underlying asset to make a trade. All they need is a sense of which direction the underlying asset is heading to make the trade.
As you do not own the underlying security but instead trading based on the performance of the underlying security, you are thus not able to liquidate or sell your position at any time like a traditional trader. Your exact maturity date, profit and loss percentage and strike price is determined upon purchasing of the trade option and cannot be altered in any way then after.
Finally, since a binary options trader do not own the underlying security unlike a traditional trader, the profit or loss of a binary options trade does not rely on the magnitude of the movement of the security, just the general direction of the movement. For example, if you purchase a cash-or-nothing call order of ABC Corp’s stock struck at $50, with a binary payoff of $1000. Now there is a breakthrough in the company and their stock sky-rocketed to $5000 at date of maturity. You will still only receive your $1000 as your payoff and hence risk of trade is determined at point of purchase.
Where can you trade in binary options?
Binary options have long been available over the counter sold from the issuer to the buyer. These are generally only available to the professional trader.
To facilitate the non-professional traders to get started in binary options trading, binary options trading platforms or binary options trading websites were created. These web based trading arena offers short term binary options with a pre-determined profit and loss structure allows non-professional traders to get started trading in binary options almost immediately.
Advantages of Binary Trade Options
Binary options trading have a few advantages over the traditional trader. One of the biggest one is none other than risk management. With binary options trading you know and set your risk in advance. Most binary options trading platform also offers a percentage amount back to you even if you lose. This will guarantee that you will never lose your entire trade on one bad trade.
The other advantage of binary options trading is that, with some of the more competitive binary options trading platform, ease of entry. New traders can get started almost immediately with little money to start an account. This is a fresh change compared to traditional trading where you will need to have a deep pocket to even get started in trading.
Finally, since binary options trading is so new, it is not as heavily regulated by the government and as such it is easy to get started trading. With the web based binary options trading platform, anyone with an internet connection can trade in binary options. Also, since binary options trade on a variety of instruments, you can make trades virtually at any time and at any place in the world.
Which markets are available to the Binary Options Trader?
Since binary options trading are trades based on the performance of an underlying security, you can trade in various markets around the world. Some of the markets available to the binary options trader include but is not limited to:
The Currency Options Market
The currency options market consists of currency pairs and their relational value to each other. Binary options trading platforms have their own sets of currencies available for trading. Currencies can fluctuate erratically at times and it’s best traded between major world economic events.
The Index Options Market
The index market is based on the valuation of a group of stock, and as such, changes in a single stock will not affect an index as much as it affects the individual stock. Indexes are therefore more stable and have longer trend lines compared to an individual stock. Some examples of famous indices are the S&P 500, Dow Jones Industrial Index, Nasdaq and the Hang Seng Index.
Stock Options Market
The stock options market is traded based on stock certificates issued by corporations. Some examples include GOOGLE, YAHOO and MICROSOFT. They are largely affected by the single company’s financial and economic performance and are therefore best traded after major earnings report from the particular corporation.
Commodities Options Market
The commodities options market is based off the future price of commodities such as coconut, cocoa, gold and silver. Future options price of commodities are very much affected by local news of the particular commodity. As an example, news of a severe flood hitting an area of major cocoa production will affect the future prices of cocoa directly.
Every binary options trader has a favorite market to trade, and as long as you do your due diligence and research your market thoroughly, every market can be profitable.
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