Guide to Binary Options and Binary Option Trading
A binary option is a fixed return option because there are only 2 possible outcomes that are fully realized at the onset of the contract.A binary option is a contract which provides the client (known as the owner) the right, however, not the obligation, to buy an underlying asset at a fixed price in a specified time period.Those items being traded are called underlying assets and they could be a range of products: currencies (e.g. USD/JPY), commodities (e.g. Oil, Gold), stocks (e.g. Microsoft, Coca Cola) or indices (e.g. Nasdaq, FTSE 100). The fixed price where the owner buys or sells at, is named the strike price.
When trading binary options, the purchaser of the option chooses whether he thinks the underlying asset will hit the strike price from the selected expiry time - this could be at the end of the nearest hour or the end of the day, week or month.The owner places a call option on his binary option trade if he thinks that at the expiry time the option would be greater than the current price. He places a put option if he thinks that at the expiry time the option will be below the current price.
In this way binary option trading is extremely flexible. The asset, expiry time and predicted asset direction could be controlled by the person who owns the investment who can select each one as he desires. The only unknown factor is that if the asset will expire higher or lower that its existing price.The returns from binary option trades are set from the start of the contract. If the option expires in-the-money then a buyer gets between 65-71% profit on the investment amount. If an option expires out-of-the-money then with anyoption(TM), the purchaser get a 15% payback on his initial investment. The certainty of binary option trading makes it a frequent way of trading for most investors since not just is a potential gain known from the offset, but most importantly the potential loss has limitations.
The primary difference with trading binary options to traditional trading is the fact that in binary option trading, a buyer is simply trading on the performance of an asset - they will not actually own the asset itself.
For a binary option trade to become profitable, the option must only move in the predicted direction - the magnitude on the move is just not relevant hence it is much easier to get a payout.Binary option trading is incredibly flexible, thanks to multiple expiry dates and times, the range of underlying assets on offer and the capacity to trade online without resorting to a broker
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