Binary Option Trading
In the ‘Binary Option Trading’, we will demystify the binary options market by explaining how all the binary options instruments (strategies) work, as well as how the market itself operates.
Structure of the Binary Options Market
The binary options marketplace is a relatively new financial market. In this market, the way profits are made is a bit different from the other markets. Instead of profits being earned solely by the asset price moving in the trader’s favour by a number of pips, the asset price has to simply be above or below certain levels. The trader gets a pre-known payout which is made up of the invested capital and the profits from the trade. Not only must the trader be able to predict the asset price direction, he or she must be able to do this within the time allotted prior to the instrument’s expiry.
In the binary options OTC market, we have the following participants:
a) The dealers who offer prices on the instrument. Notice that in this market no assets are exchanged. The contracts are derivatives of the underlying asset and perform based on the price and behavior of the underlying asset that is traded.
b) The clients. These retail clients are the ‘buy side’ in the transaction. They trade via the internet and have to have enough money deposited in their account in order to buy an option. There are no margin calls, cash is demanded by the dealers up front prior to a position being opened.
The balance of payments in the market is such that there are generally more losers than winners on the client side, so payment of the winnings to successful traders should NEVER be a problem. When traders start having withdrawal issues with dealer, then something else is going on. It is important for all players in the market to understand how the market works. It pays to know a little about a financial market you are committing your money to.
Binary Options Trade Types/Instruments
The binary options market is not based solely on buying and selling of assets, but rather on buying contracts that predict the behaviour of assets in certain ways. For instance, there are trades that predict whether an asset will range-trade or break out of a price range, move up or down, or reach a price milestone or not. The following trade contracts are traded on the binary options market:
High/Low (also called Up/Down, Above/Below or Call/Put options)
These are the contracts that trade on whether an asset will end higher or lower than a reference price point that may be the market price or a price chosen by the trader.
Want to make money on whether an asset will trade in a range of prices or breakout of this range within a time period? This is the trade of choice. It is also called the tunnel trade, range option or boundary option.
High Yield options: These mimic some of these aforementioned trade types. The hallmark of these options is that they give traders difficult targets to achieve, but promise very high payouts of up to 400% or eve 500%, depending on the broker used.
Touch/No Touch: It is fun to watch prices aim to achieve price milestones. They can either touch a price level, or fail to reach that level. This is for traders to decide with the Touch/No Touch option.
Binary Options Expiries
A unique feature of the binary options market is that trades can have ultra short times to expiry. Usually, when discussing conventional traded options the expiry is at least one week long. With binary options the expiry can be as short as one minute with some operators offering timescales down to 30 seconds. Usually the broker sets the time for the trade to end although some platforms allow the trader to determine the expiry time.
How Money is Made in Binary Options
Money changing hands in the binary options market consists of:
a) The invested amount.
b) The payout for the trade.
The invested amount is the money the trader uses in buying the trade contract. The trader is at liberty to decide how much he will use to purchase the trade contract. However, it is always advisable to use good risk management by not committing too much into a trade.
Payouts are sometimes determined by the brokers by default. Some platforms will however, adjust the default payout according to the expiry time of the trade, expected outcome of the trade, and difficult level in terms of how possible it is for the trade contract to perform according to the trader’s setting.
‘Binary Options Trading’ is a brief summary of how binary options work. If you have read this thoroughly, you should be able to understand how the market works and use it to your advantage.