Binary options have become one of the fastest growing sectors of the finance industry. While the basics of binary options can be learned within a few minutes, there are numerous advanced strategies that traders and investors can learn in order to increase their chances of receiving a high return payout.
Binary options are high return, short term investments traded by both professional traders and amateurs. Based on exotic options, which are only traded on private markets, binary options are traded over the counter and available 24 hours a day, 6 days a week.
What are Binary Options
Binary Options, also known as Digital Options, all-or-nothing options, or Fixed Return Options (FROs). Binary Option is a trading instrument with the fixed return, which is defined at the outset of the trade.
Binary Option is in essence nothing more than a prediction on which way the price of a stock, commodity, index, or a foreign currency will move by a designated expiration time.
With Binary Options, a trader never purchases or owns the asset – as he is only predicting the direction that the asset will go. If he predicted correctly, then the trade is considered “in the money“, and the trader will receive the fixed return on his investment. If he predicted incorrectly, then the trade is considered “out of the money“, and he will lose the amount agreed upon in the option.
Binary Option Brokers
Until recently, binary option trading wasn’t open to individual investors. The only way individuals could access binary options was to hire a middle man, or a binary option broker. Typically, to hire a binary option broker costs a minimum of $500 up front, making it extremely difficult for many individuals to enter the market.
While individual investors can still hire a binary option broker, in the past few years it’s become very easy to directly trade binary options online, saving investors thousands of dollars.
Many individual investors manage multiple accounts and trade different types of options at the same time while others have tended to focus their investments in specific markets.
Benefits of Trading Binary Options
There are many benefits to trading binary options when compared to more traditional options trading or other investment vehicles. These benefits range from the potential profits, to the ease of use. While binary option trading is not a perfect fit for everyone, most investors, from absolute beginners to seasoned veterans, find it to be an exciting, profitable way to invest.
- High Return
Binary options are an excellent choice because of their high return. While most traditional stocks and options must mature over time, binary options generally yield 75% – 81% or more in as little as one hour.
- Short Term Investment Option
While traditional options can take years to mature, the majority of binary options expire within one week, one day or one hour or less than an hour. This means that an investor can make between 170% – 181% on a single contract in one hour or less. If the strategy being used is sound, a trend in the market can continue to be used time and time again as long as it holds true, enabling the investor to double their investment every hour so long as the trend continues. On the other hand, if an investor would like to refine their strategy and choose another option or direction to purchase, options expire in a relatively short amount of time and on OptionBit, you can even buy your option before the time of expiration to minimize your risk.
- Small Investment Friendly
Binary Option is also extremely accessible to investors who want to invest small amounts of money. With binary option, an investor can follow a market trend and almost double their investment, yielding enormous profits. By diversifying carefully as profits are generated, prolonged profits can be sustained and help build a buffer against potential losses.
- Calculated Risk and Reward
One of the biggest advantages of binary option trading is that the return on initial investment is fixed. From the onset, the amount of potential profit or loss is known. This means that a trader will never lose more than they expected and can calculate their risk as perfectly as possible and that there is a cap on how much can be earned or lost in a single trade. Since the rate of return is quite high, and trade times are short, in the long run the fixed rate of a binary option can be a huge advantage.
- Advantage in Volatile Markets
Finally, binary option trading has an immense advantage in volatile markets, because it offers a somewhat safe way to continue investing. While traditional investments can be rocked by the volatility of the market, and huge losses can be incurred, the fixed rates of binary options mean that no matter how drastic the swings in the market, the fundamental principles remain the same.
This combination of a high fixed return, relatively transparent risk, and short contracts means that binary option trading can produce very high returns on an initial investment. Even a relatively small investment can, in a short period of time, produce massive profits.
- One Pip Only
In comparison to other types of day trading, where your profits are determined according to the delta between the price you bought the asset and the price you sell it at, binary options do not require more than one pip in order to be in-the-money. While forex trading and other forms of online trading require that you have three pips just to start trading.
Binary Option Basics
- The Asset – The first component of a trade, is the asset. Depending on which binary option broker you choose, you’ll have a range of assets from different financial markets, like stocks, commodities, currency pairs and indices, that you can trade binary options on. Some traders choose to specialize in one asset, or one market, while others trade a collection of options simultaneously.
- The Contract / Time of Expiration – The next component to trading is the binary option contract. Most binary option brokers offer contracts that expire in one month, one week, one day, or one hour, but on OptionBit’s trading platform you can also trade options as short as 15 minutes or buy an option just five minutes before it expires. It’s important that you know just how much time there is before the option expires so that you can make an accurate prediction.
- The Forecast or Prediction – Your job as a trader is to determine which direction the price of an asset will move before or at the time of expiration. If you believe that the price of underlying asset will increase, then you should choose the Call (Above) option. If you think that the price of the underlying asset is going down you should choose the Put (Below) option. If you are correct in predicting which direction the price of an underlying asset will move, you’ll receive a high return on your investment between 75 – 81% — nearly doubling your investment.
Types of Binary Option
Three types of binary options, Above / Below, Touch and Range. Traders can achieve great flexibility with their trading by exploiting the unique characteristics of each type.
Above / Below
Above / Below is the most popular type of binary option and the one that the majority of traders are familiar with. Based on “cash-or-nothing”, Above / Below binary options expire in-the-money when the trader correctly predicts if the price of the underlying asset will move above or below the predetermined strike price by the time of expiration. Like with all binary options, payouts are known from the onset so that traders know where they stand before buying the contract.
Touch options are another type of binary option available on OptionBit. Touch options expire in-the-money if the price of the underlying asset touches a predetermined barrier by the time of expiration. Price barriers can be higher or lower than the current price of the underlying when the option is purchased, enabling traders to take advantage of the traditional omnidirectionality offered by binary options. OptionBit also offers variations on Touch, including “Touch Up” and “Touch Down”.
Range is the third type of binary option offered by OptionBit. Based on tunnel trading, Range options have a predetermined upper and lower boundary. When buying a range option, the trader must predict whether the price of the underlying asset will stay “In” or go “Out” of a predetermined range at the time of expiration. This way the trader can trade on the volatility of the asset – If he or she thinks that the asset volatility is high, he or she can buy an “Out” of the range option. On the other hand, if the trader thinks that the option is not volatile, he or she should buy an “In” range option.
Analysis of Binary Options
There are many factors involved in direction that assets move, a fact which is readily apparent even to new investors. However, successful traders can analyze information and make educated predictions before they choose their options. There are two main ways to analyze the market, through fundamental analysis and through technical analysis. Both methods may be used independently or in conjunction with the other.
Technical Analysis is the process of analyzing statistics and data about specific options in order to more accurately predict which direction the asset will move. There are many different methodologies used in technical analysis, both objective and subjective, including means reversion, tracking momentum or moving average convergence divergence (MACD), trend following, and pattern recognition.
Fundamental analysis is a method of prediction that looks at available facts to come up with an idea of how the market will move. These facts may come from public statements, news reports, current events, and virtually anything else that might impact the value of an asset. The fundamental analyst then examines that collected data to try to predict new trends in the market.
- Bullish Strategy – A bullish strategy is employed when a trader believes that the price of a specific asset will follow an upward trend and gain value.
- Bearish Strategy – A bearish strategy is employed when a trader believes that the price of a specific asset will follow a downward trend and loose value.
- Range / Volatility Trading – Range trading, or volatility trading as it’s sometimes Called, gives traders the ability to trade on a range of prices. For example, if a trader believes that the price of Gold is fairly stable, he or she can purchase an option that is “In” the range. On the other hand, if the option appears to be volatile, the trader can buy an “Out” of the range option.
- Fence Trading – Fence trading gives traders the opportunity to win no matter what direction an option moves.
While the most common binary option assets are fairly traditional, like commodities, stocks, indices and forex, one advantage binary option trading has over many other financial exchanges is that option trading is not limited to a specific market, index, or asset. This means that if a specific asset isn’t available, you’ll be able to choose from variety of assets on open markets around the world–giving you the opportunity to trade 24 hours a day, 6 days a week.