Binary options are one of the newest financial instruments that normal traders can use in the market without having to understand complex valuations. With a binary option you are placing a trade based on what direction that you think a given security is moving. With the boom in online option brokers, there are also many opportunities to trade options from anywhere in the world. But are they good financial instruments for you to trade?
What are Binary Options?
Binary options are also called all-or-nothing options because of the outcome of the trade. Simply, if your trade is successful you will get a return equal to 75 to 85 percent of your initial investment. If your trade is unsuccessful, you will lose the money that you put into the trade. You either win or you lose. There is no middle ground.
Binary options come with a strike price that defines the price that needs to be met and an expiry time. Expiry times can vary, but the condition of the trade has to be met before the option reaches the expiry time.
There are three types of binary options that you can trade. They are:
- High/Low Options: Your trade is based on if the price of the security is going to be above or below the strike price at the time of expiry.
- Touch/No Touch Options: You trade based on if the price of the security is going to touch or not touch the strike price before the expiry time.
- Range Options: You trade based on if the price of the security is going to be inside or outside of the defined range at expiry time.
There are several reasons why you might want to trade binary options instead or regular options or other financial instruments.
Easy to Understand
Because they are all or nothing, digital options are easier to understand and price than other options. You know the returns that you will get before you get into the option. This does cap your returns but it also caps your losses.
Low Barriers to Entry
You can get started trading binary options with as little as $100 in your account and still make a decent return. This makes them very accessible to beginning traders. With other financial instruments you are either required to make a much larger deposit or your returns on even big price movements will be low because of the small size of your trades.
Simple to Trade
Binary options are also very simple to trade. You only need to look at the price of the security and make a judgment if the price is going to move up or down. With one click the security is yours and you’re in the market. You don’t have to worry about closing your trade or stop losses because the trade will automatically be closed at the expiry time.
Can Trade Multiple Assets
There’s always a bull market somewhere, and with most binary options brokers you can find that on any day. The best brokers let you trade up to 70 different underlying assets from forex to individual stocks. No matter what you prefer to trade, you can do it in the binary option market.
Binary options are a great way for many traders to get their feet wet. But what they aren’t a substitute for fundamentals. They may seem easy, but if you want to be a profitable trader, you need to still pay attention to charts, news, and fundamentals instead of just your gut instinct or how you feel that day. However, coupled with a good trading strategy, binary options can be very profitable for even new traders.