Binary options, or fixed return options, are considered to be exotic trading options, yet they are the most uncomplicated trading instrument in the online trading market today. They are considered easy to use, and they are a simple way to trade in the price fluctuations in stock, commodities, foreign exchange, and indices on all the global financial markets. In this article we will look at what they are and how to use them.
What are Binary Options?
Binary options trading is one of the most misunderstood financial trading instruments in the financial trading industry today. They are different from traditional options as there are different pay-outs, fees, and risks; consequently, it is important for the trader to have an intimate understanding of the risks and rewards involved when trading in binary options.
Options are always traded on different platforms that are used to give certain advantages to the customer, or to provide the traders with specific tools that will make their trading easier. You can read more about trading platforms in this article.
So what is “Binary Options” anyway? Well it is the physical enactment of its name. The word “binary” means “comprising of two elements”, and the word “options” is understood to mean “choice”. In other words, binary options offer the online trader one of two choices. It is a financial option in which the trader retains the predetermined fixed monetary amount, plus a stated percentage of the fixed monetary amount, or nothing at all.
Binary options traders do not buy and sell the assets that are listed on the global financial markets. They trade on whether the price of the underlying asset will increase or decrease within a specified timeframe. This price is known as the strike price. If the trader correctly predicts the movement of the strike price within the specified timeframe, then he/she is paid a predetermined fixed return, regardless of how much the price of the underlying asset has moved. Conversely, if the trader has incorrectly predicted the price move, then he/she loses the predetermined fixed amount.
If a trader believes the price of the underlying asset will rise in a predetermined time, then he/she will purchase a “call.” On the other hand, if the trader believes the price of the stated asset will fall in the predetermined time, he/she will buy a “put.” If the price of the asset rises at the expiry time, the trader has successfully predicted the movement of the stock’s price. For the “put” to make money, the underlying asset’s price must have dropped at the expiry time.
Different types of Binary Options
There are 3 basic types of options:
• High-low option
This is the most common and most basic type of binary option. When trading using this option, you need to choose which underlying asset you are going to trade on. After this, you need to decide whether the price (strike price) of this asset is going to increase or decrease within the specified time. You then place a predetermined amount of money to secure your choice or option. Depending on your choice and the resulting movement of the strike price, you are either “in the money” or “out of the money.” In other words, you either keep your initial investment or you lose your initial investment.
• One Touch
The One Touch option works slightly differently to the High-Low option. When trading using this option, you have to decide, when looking at your chosen asset, will the price reach a certain trigger point by the stated expiry time? The further away the trigger point is from the starting price, the higher your investment.
• Boundary/ Range
When trading using the boundary option, you trade in a channel. In a nutshell, you need to decide what the upper and lower price ranges will be during a specified time. You can then choose whether the price will stay in the specified boundaries, or move out of the range within your specified timeframe. Depending on your choice, and the price movement of the underlying asset, you are, once again, either “in the money” or “out of the money.”
The above options are just the basic options that Stern Options offers for its beginner traders. The company also has a variety of the more advanced trading options for its clients on offer; however, these options require an advanced and detailed analysis of the price movement of the underlying asset before trades should be placed. If the detailed analysis of the historical, present, and future movement in the price of the underlying asset is not done, the trader risks losing a fair amount of money. If you want to know more about Stern Options you can read more about their support team in this article.