Understanding Binary Options “Guaranteed Return” Rates
In binary options trading, the rate of return is crucial. It is, after all, how much you stand to receive if your trade is in the money. It also tells you how much you stand to lose if your trade is unlucky enough to be out of the money.
Since trading is volatile and far from guaranteed, and binary options trading can result in losses – even for expert option traders – you will need to mitigate your losses as much as possible. You will lose money every now and then, but you do not have to lose everything you have invested in your trade.
This is where the protection, insurance or guaranteed rate comes into play. This article will explain how guaranteed rates from certain option brokers help mitigate your losses and play into your option trading strategy.
What are Protection or Guaranteed Return Rates?
In binary options trading, there are two possible outcomes depending on if your asset is in-the-money or out-of-the-money at expiry time. Finishing in-the-money is great, and every option trader does so at least some of the time. But, what happens if you finish out-of-the-money – do you lose your entire investment?
Not always. Some option brokers offer what are called guaranteed return or protection rates. These are special rates that help cut your losses and return a certain percentage of your investment to you should your trade finish out of the money. This effectively reduces the cost of your trade should it finish out-of-the-money and is used by some option traders to make their option trading strategy more aggressive (more on that later).
How much can you expect to receive as a guaranteed return? The amount varies between option brokers – and not everyone offers a guaranteed return. Plus, those that do may only offer guaranteed returns on certain types of binary options trades and exclude others, such as popular Touch trades.
In general, though, you can see brokers offer rates anywhere from 5% to 15% of your investment, with most offering 10% protection for your trade. That means if an option trader places a trade with $100, he or she will receive $10 for every trade that is out of the money.
Generally speaking, brokers offer guaranteed returns on anything from standard binary options up to riskier exotic option types, like Range options. This offers an incentive for those to take on the riskier – but more profitable – option trades.
Using These Options in your Option Trading Strategy
All things being equal, you should go with online brokerages that offer guaranteed returns if at all possible. This is essentially free money, in a manner of speaking. Instead of losing the entire amount, you can get a small return – which, in the long run for an avid trader, saves you money.
Again, you will lose some trades. It happens to everyone. If all other things are equal between two brokers, wouldn’t you want one that gives you a little something back each time? You can increase this benefit by finding a broker that offers something substantial, like 10-15%.