Binary Options are some of the simplest financial instruments you can trade. But you'll still need to know the jargon. We explain exactly how they work, and their pros and cons versus other assets. We'll also talk about how to choose a binary options broker.
What are Binary Options?
The name Binary options explains this financial instrument pretty well. Just as a binary system has two states, on and off, and binary numbers contain 2 symbols, there are 2 varieties of binary options: a Call Option that pays when prices rise and a Put Option that pays out when prices decline (well, there's a bit more complexity, but we'll go into that later). We also explain the difference between binary options and standard options.
Binary options have fixed odds- (unlike spread bets, for example- read our article that covers the difference between binary options and spread betting). The payout is set before the trade is made (they are also known as digital options or fixed-return options). Binary options can be taken out on all sorts of financial assets including forex currency pairs, stock market indices, individual stocks, commodities and precious metals.
Binary Options have become a popular alternative in recent years, because they provide an easy to understand, lower risk way of getting involved in the financial markets. Due to the nature of these instruments, you always have a finite risk on each and every trade (unlike leveraged trading, for example, where you may end up losing more than your initial investment if the market runs away from you).
All things considered, Binary Options are easier and safer for people who are new to trading the financial markets. As we explain in our binary options tips, they allow you to limit the risk on a trade moving out of the money, as opposed to forex trading. They also provide a useful mechanism for advanced traders to hedge other trades that might be leveraged.
The payout of a winning trade is set by the binary options broker (a key criteria to understand when deciding who to trade with), and usually ranges between 70-85%.
Different Types of Binary Betting:
Of course, life in never that simple, and in recent years a number of different products have been launched over and above the standard binary bet, which consists of choosing something to trade, picking an expiry time and deciding whether its price will rise and fall. So now you can take out a Range Option, a Touch Bet, a One Touch Bet and even a 60 Second Bet.
Standard Option(Call/Put): The most widely traded: you predict whether the price of an asset will rise (Call Option) or fall (Put Option) within a certain period of time. If your forecast is correct when the option expires, your winning bet is paid out.
Touch: The option will expire in the money and will pay out as soon as the asset touches a preset price- so a winning option may expire early. If the asset does not touch the predetermined rate and expires, the option will be closed out of the money and you lose the bet.
60 Second Options: like a standard option, but with a very fast expiry time (1 minute).