What Are Binary Options?

What Are Binary Options?

Trading with Binary Options offers a simple and potentially profitable way in which you can get involved in the financial markets and earn a profit. While options are not a new concept, the ability for retail traders to use a simplified version of this concept is.

Changes to investment regulations in 2008 opened up the path for binary options brokers to sell simple versions of these contacts to the retail market.  This together with the simultaneous explosion in online trading, sparked a huge interest in binary options.

How Binary Options Contracts Work

The binary options contract is in its most simple form an agreed contract that pays out provided the conditions of the contract are met at a set expiry time.

For example the contract could be set for the price of an asset to to rise and finish above a set price level at an agreed time. Provided this condition is met at point the contract expires, the agreed payout is made.

Binaries get their name from the all or nothing return the trader makes at the expiry. If the conditions of the contract are met the broker will credit your account with the stated return. However if the option conditions are not met then the contract will expire worthless.

The Basic Option Contract

The most basic of options contracts are known as the ‘Call’ and ‘Put’ options. These payout provided that the asset traded finishes either higher (Call) or lower (Put) at expiry than the price level of the asset when the contract was placed. The duration for the contract to run is set with the broker and will typically last for one hour. However it is possible to place options contracts with some brokers for much shorter or longer expiry times.

As the interest in binary trading has grown, options brokers are increasingly offering other types of binary contracts. These allow you to profit from alternative outcomes in price movements. The most common of these are the Boundary range and Touch options contracts.

The Asset Index

The Asset Index is the name given to the range of markets offered for trading by the a broker. The competitive nature of the binary industry means that binary brokers are increasingly seeking out new financial markets which they can offer their clients for trading.

Most brokers offer a fairly comprehensive range of asset classes; Global Stock Indices, Forex currency pairs and major commodities. Stocks and shares are also provided for trading. However if you plan on using a specific trading strategy then be sure to check the brokers asset index. The range of assets you can trade varies between brokers.

High Returns

The key attraction of binary options are the high potential returns. Furthermore unlike many forms of investment, payouts can be earned in hours or even minutes. Many contracts offer the potential to earn 70-90% for a successful ‘in-the-money’ expiry. You can in many instances earn several times this amount on some contracts. In either case the payouts are attractive.

This payout level is fixed at the outset. This means that you stand to receive the same payout, even if the price ends only 1 tick in your favor.You don’t need to spot the big moves to still make high returns. This is why traders find these contracts so attractive.

Trading Risks

While any form of financial trading carries risks, there is a unique upside to trading with binaries. Just as the return you are paid out is ‘fixed’ so too is the risk. No matter how the price level of an asset moves you can never lose any more than the amount you used to purchase the initial option contract. This is your only liability.

What is more, there is no need to factor in margin requirements as with Forex trading. You can only purchase contracts with cleared funds that you have deposited to your account. This eliminates the potential worry of your broker chasing you for additional deposits to cover any open positions in your account.

Binary Options has proven popular because they offer a simple way for virtually anyone to get into financial trading. This is because this particular trading method does not rely upon any complicated procedures for trading. It is simple to use signals to place in a trading account.

Below we provide a brief explanation for the different types of contracts you will find available from the top binary brokers in the industry.

Binary Option Contract Types

CALL PUT OPTIONS

There are two principle contracts that are used in Binary Options are the ‘Call’ and ‘Put’. These are sometimes referred to as High or Low Binary Options contracts. They work by paying out a fixed sum if you can predict if the market will move higher lower by the set expiry time on the contract. The price is measured in relation to the price at which the contract is purchased. Provided the obligation of the contract is met, i.e. the price finishes either higher or lower (in line with your prediction) then you receive the payout. Alternatively the contract expires worthless. Some brokers will however offer a rebate of a proportion of your initial stake.

TOUCH OPTIONS

Touch or No Touch contracts allow you to set a price level that you believe that the market will or will not touch over the duration of the contract. With a Touch contract you don’t have to wait until the set expiry time on the contract. You receive your pay out as soon as the market ‘touches’ the level that you have specified.

BOUNDARY OPTIONS

The boundary contract works in a similar way to the Touch contract. However rather than specify one level, with this contract you specify two; one above and one below the current market price. Most binary options brokers will give you the choice of profiting from the price staying within the range you set or moving outside of it.

PAIRS OPTIONS

The pairs option is one of the latest innovations in the industry. These contracts work in a slightly different way. Here you are trying to predict the price movement between two separate assets. So for example, you may think that the price of a particular company, say Google, will perform more strongly than Microsoft. You can then open a contract to profit from this outcome.

Pairs contracts provide a good way to trade when the general markets are showing little signs of movement, as you don’t need to be able to identify strong trends of movements from which to profit. Instead you are simply playing the strength/ weakness of two assets against each other.