Binary options or digital options are a fairly new trading instrument where an investor can gain by correctly guessing the price fluctuations of underlying assets in the financial markets.
At first instance, investing in binary options appears to be a very lucrative proposition, as no actual trading of the assets takes place, but one needs to understand the risks associated with the binary trading. Binary options are quite different than traditional options, and may involve different fees, risks and investment structure.
Binary options have two potential outcomes, and a trader needs to fully understand how to correctly judge the outcomes correctly to stay profitable in the trade.
How Binary Options Work
Binary options offer fixed payouts, and thus a trader can know how much he would gain for his correct predictions. The assets have predetermined wins or losses, and a trader needs to estimate whether a financial instrument will rise or fall in a given period of time. If the trader estimates for an asset rise, he needs to make a “call” option.
On the other hand, if it’s estimation for an asset’s fall, the “put” option can be made. If the investor becomes successful in predicting the market movement of an asset, he receives a fixed payout. But if the investor’s estimate is not in the right direction, he may lose his money invested in a particular asset.
What to look for while trading binary options?
In-the-money: In binary options trading, there is always a fixed payout that an investor can make on each correct prediction on a particular asset. This is called “in-the-money” and it may typically vary between 65% and 80% from broker to broker and asset to asset. Thus, in order to earn lucratively on your investment, you need to select a binary options broker who can guarantee you an “in-the-money” in the range of 70-80%.
Out-of-the-money: In binary options trading, there are also pre-determined losses that a trader may have to suffer, if he fails to predict the movement of an asset correctly. This is known as “out-of-the-money” and typically lies between 0 and 15%. There are many brokers who do not offer “out-of-the-money” guarantee at all. So, while choosing a broker, you need to see if the broker is offering an “out-of-the-money” guarantee so that you don’t lose all the money invested with them.
Time of expiration: The rise or fall of asset is considered for a specific period of time and for which a trader either earns or loses money in the market. This time span is known as time of expiration for a specific asset.
Trading Binary Options in simple steps:
- Open an account with binary options broker. You can search on the internet and choose a suitable broker as per the investment level, assets offered by them, the earning opportunity and the “out-of-the-money” guarantee with them.
- Fund your account. All brokers maintain a minimum deposit amount and offer several ways of funding an account.
- Choose an asset to invest in. All brokers maintain a portfolio offering several financial assets from the global market.
- Choose the investment amount. You can choose a suitable amount to invest in a particular asset. However, most brokers maintain a minimum and maximum trade size.
- Choose an expiry time of your choice.
- Choose “call” or “up”, if you think the price will go up. Choose “put” or “down”, if you think the price of your chosen asset will go down.
Wait for the expiry time and see if your estimation goes right. If your prediction will be right, you will earn a fixed payout offered by your broker. This is the simple and exciting way of making money with binary options trading.