A binary option is a financial product where the buyer receives a payout or loses their investment, based on if the option expires in the money.
Binary options depend on the outcome of a “yes or no” proposition, hence the name “binary.”
Binary options have an expiry date and/or time.
At the time of expiry, the price of the underlying asset must be on the correct side of the strike price (based on the trade taken) for the trader to make a profit.
A binary option automatically exercises, meaning the gain or loss on the trade is automatically credited or debited to the trader’s account when the option expires.
Basics of Binary Option
Binary options depend on the outcome of a “yes or no” proposition.
Traders receive a payout if the binary option expires in the money and incur a loss if it expires out of the money.
Binary options set a fixed payout and loss amount.
Binary options don’t allow traders to take a position in the underlying security.
Most binary options trading occurs outside the United States
Binary options differ in that they don’t provide the possibility of taking a position in the underlying asset.
Binary options typically specify a fixed maximum payout, while maximum risk is limited to the amount invested in the option.
Movement in the underlying asset doesn’t affect the payout received or loss incurred.
The profit or loss depends on whether the price of the underlying is on the correct side of the strike price.
Some binary options can be closed before expiration, although this typically reduces the payout received (if the option is in the money).
Difference Between Binary and Vanilla Options
A vanilla American option gives the holder the right to buy or sell an underlying asset at a specified price before the expiration date of the option.
A European option is the same, except traders can only exercise that right on the expiration date.
Vanilla options, or just “options,” provide the buyer with potential ownership of the underlying asset.
When buying these options, traders have fixed risk, but profits vary depending on how far the price of the underlying asset moves.
Binary Options and Regulation
Binary options occasionally trade on platforms regulated by the Securities and Exchange Commission (SEC) and other regulatory agencies,
But most binary options trading occurs outside the United States and may not be regulated.
Unregulated binary options brokers don’t have to meet a particular standard; therefore, investors should be wary of the potential for fraud.
Conversely, vanilla options trade on regulated U.S. exchanges and are subject to greater oversight.
To be a successful binary options trader, you need to use more than one broker.
Register with your chosen trading platform and deposit money to start trading. The minimum deposit for some trading platforms or binary options robots is only $ 100.
Select the asset to trade. Trading platforms have assets such as currencies, indices, commodities, and stocks. You can choose to trade in currencies, the popular one being EUR/USD.
Decide on the amount to invest. When investing in an asset, you will see the payout or the returns for the asset, which can go up to 91%. Make your prediction on the movement of the price of the asset. If you predict the price of the asset to rise, select Call (up). If your prediction is that the price will fall, select Put (Down).
When the trading closes after the given time, for example after 60 seconds, if it is a 60 seconds investment and you have made the correct prediction, then you win. An investment of $ 100 with a 90% payout means that you will have made 90 dollars in a few minutes.
U.S. Binary Options Explained
Binary options provide a way to trade markets with capped risk and capped profit potential, based on a yes or no proposition.
Let’s take the following question as an example: Will the price of gold be above $1,250 at 1:30 p.m. today?
If you believe it will be, you buy the binary option. If you think gold will be below $1,250 at 1:30 p.m., then you sell this binary option. The price of a binary option is always between $0 and $100, and just like other financial markets, there is a bid and ask price.
The above binary may be trading at $42.50 (bid) and $44.50 (offer) at 1 p.m. If you buy the binary option right then, you will pay $44.50. If you decide to sell right then, you’ll sell at $42.50.
Let’s assume you decide to buy at $44.50. If at 1:30 p.m. the price of gold is above $1,250, your option expires and it becomes worth $100. You make a profit of $100—$44.50 = $55.50 (minus fees). This is called being in the money.
But if the price of gold is below $1,250 at 1:30 p.m., the option expires at $0. Therefore you lose the $44.50 invested. This called out of the money.
The bid and offer fluctuate until the option expires
