What are Binary Options?
A binary option is an investment tool that shares some of the same risk and reward traits as sports betting. A binary option is a simple yes or no proposition. For example, Will a particular asset price finish higher that the current price when the option expires – Yes or no?
The trader is either entirely right, or entirely wrong. The potential profit or loss is known before the trade is confirmed. In this respect, binary options are similar to sports betting. The return in binary options is normally between 70% and 95% (plus the initial investment). If the the trader is wrong however, they will lose the full amount invested. Very much like backing a 4/5 selection in a football match, or horse race.
So binary options could be seen as an investment tool that bridges the gap between sports betting and more traditional investment. With binaries, the stake and potential returns are known at the outset, just like a sports bet. With a traditional investment in shares for example, the actual returns are unknown, even if the trader is proved right. The potential downside, or financial loss, is also unknown. It is the simplicity associated with binary options trading that has seen it grow as an investment vehicle.
What types of binary option trade are there?
Above, we discussed a simple ‘High/Low‘ binary option. There are other types of option though – but all of them have a ‘binary’ outcome (Yes/No or High/Low etc). ‘One Touch‘ is a type of option where the asset price just needs to reach a certain point in order to finish “in the money” (meaning the trade will payout). As long as the target price is reached once during the trade period, the touch has been made.
Another form of option is the ‘Boundary‘. Here the broker will set a high and low price, and the binary option is whether the current price will remain within those ‘boundaries’ or finish outside of them.
Beyond that, brokers offer long term trades (weeks or months), or very short term trades. Perhaps even as short as 30 or 60 seconds. These type of trades can be extremely exciting, though not necessarily favoured by some traders. In addition there numerous other option types – but the binary outcome always remains.
Where to trade?
Binary options trading has, in the past, suffered for not being regulated. That has all changed in recent years however, and there are now a long list of brokers who are fully regulated. This has ensured the industry has been very quickly cleaned up and there are now some well established brands offering serious traders a place to do business. www.binaryoptions.co.uk is one site where the majority of these brokers are listed. From here, brokers can be compared against important factors such as the type of assets they have available to trade (Commodities, indices, stocks or Forex prices), account bonuses or the really important factor – payout levels.
Binary options is a growing investment tool. Serious traders are using it as a hedging tool or to extract large returns very quickly from a particular asset. While visitors newer to trading on the stock market are attracted by the simplicity and clearly defined levels of risk and reward of binaries. Why not think about joining them?
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