Binary Options Explained
Binary Options Explained
February 8, 2012Binary Options Defined: Binary options are a type of stock option in which the payout is designed to be either a fixed or pre-approved amount of compensation if the option expires in the money invested, or nothing at all if the option expires outside of the initial funds invested.
Binary options are different from plain vanilla options at times referred to as “all-or-nothing options” or ”digital options”.
These are the most common or used financial instruments, such as the basic stock options, swaps, bonds (in all their forms), and futures. Binary options are exactly the opposite of vanilla stocks and may be considered by some to be an “exotic” instrument, which alters the variables of the more traditional financial instruments, thereby creating a more complex security instrument.
For example, if a plain vanilla option is an example of a type of standard or low risk option, one with a simple expiry date and straight-forward strike price with no added features, binary options may be considered a more exotic option, such as a “knock-in option”, in this case online investors will need an additional contingency or safety mechanism that should be added so the option only becomes active once the underlying stock price hits the set price point.
If you’re looking for a good way to make money trading online without minimal the risk to your portfolio, then investing online in binary options is an option you need to consider. Whether you a novice or seasoned trader, diversifying your trading portfolio and investing in binary options is the right move for you. Right now, day traders with little or no knowledge of various financial markets or instruments are betting on the stock market, the currencies, commodities, EFT’s, as well as the main indices and making a lot of money investing online in binary options.
When considering all of the various investment tools out there, binary options are considered to be one of the simple ones. Often referred to as “all or nothing” options, in binary options there are only 2 possible outcomes – you either win and get paid, or not.
Investing in binary options is a fairly simple process. As an online trader, you have totry and predict as much as possible which direction the price of an assumed asset (i.e currency, commodity) will go. If you think the price will increase, then you need purchase a call option. Alternatively, if you predict that a price will decrease, you need to buy a put option.
If you predict correctly the direction of the price change (for example, you buy a call option and prices rise) then you will get paid for the maximum pay out. Online traders also refer to this as being “in the money”. Alternatively, if the opposite scenario occurs (meaning the prices decreased and the trader bought a call option), then you would have lost the premium, or the amount of money paid for the option. This is also referred to by traders as you being “out of the money”. Some binary options brokers will offer you cash back as an incentive to traders that are “out of the money”.
Binary options (often referred to as digital options) are usually divided into two types– “cash or nothing” and “asset or nothing”. When referring to the “asset or nothing” type, the value of the futures payouts actually depend on the real value of the security, or money you invested in the option. In the “cash or nothing” options, contracts which expire “in the money” are allocated a pre-determined amount of money (the industry range stands at 60% to 81%, depending on the binary option broker you choose). Alternatively, Binary options contracts are usually available when investing in various types of assets such as commodities, forex (foreign exchange), stock options, and of course the main indices.
Investing in binary options is very popular among day traders as well as on Wall Street. This is due to the volatility levels existent today in almost all forms of investment tools. Because the payout levels are unaffected by the polarity of price changes, binary options are considered by many as a much easier and simple investment route. Furthermore, the level of risk is only as high as the amount invested for the initial purchase of the binary options deal. Online traders also use it to diversify their investment portfolio and hedge their risks on the various other investments.
