Understanding Binary Options and How This Type of Trading Works

May 29, 2013

Tech News

How do binary options work? First of all, trading in these options is a very unique business because you can stand to make, sometimes, close to 500 percent of your original investment. That being said, the business can also be risky and complicated at times. Trading surrounds two basic kinds of binary options. The first is referred to as the call, which is purchased when a trader believes the price of an option’s asset will increase. On the other hand, if the belief is that the price of the option’s asset will decline, then a put is entered. Here’s how this kind of trading works.

Here Are the Advantages

First of all, the risk of any investor trading in binary options is always defined. This means that you’ll only ever lose what you invested, and nothing more. You’ll also benefit from no trade closure or margin call by a broker prior to the expiry time. In addition to this, you can reasonably expect a relatively high rate of return in just a short period of time. This allows you to profit from markets as they rise or fall. It’s important to note that trading in these options means absolutely no spread. This just means that it’s more than possible for you to win with even just 0.1 pip.

Here Are the Disadvantages

While the advantages are quite apparent, as explained above, there are also some notable disadvantages with this kind of options trading. For starters, nearly all of the different brokers offering their customers trades in these options are not regulated. If an industry’s not regulated, then it can be easier for chaos and uncertainty to reign. Also, the options market is quite aggressive and rapid, which means that, theoretically, it would be entirely possible for you to lose your whole investment in just a few short minutes. Finally, many of the brokers who deal in these kinds of options are illiquid.

What To Consider Prior To Choosing an Options Broker

There are lots of things to consider before choosing an options broker. Beware of brokers who claim to purchase binaries from banks and then sell them to you, all in return for commission. No legitimate bank offers binary trading. Beware of a broker that won’t give you fair market price during the expiry. Getting fair market price is extremely important since you might very well lose a hefty chunk of cash with even just 0.1 pip, though the actual market price was to your advantage.

Now you know all about binary options and how this specific kind of trading really works. Essentially, these options are based around just two important principles. The first one is the call, which occurs when a trader truly thinks that the price of an option’s asset is going to go up. The second one is the put, which happens when a trader believes that the price of an option’s asset will go down. Before trading binary options, it’s always a good idea to review the risks in this market, since trading is usually fast and somewhat unpredictable.

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