What Is Binary Option Trading and How Does It Work?

Financial Trading
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A binary option is a financial system where the interested trader receives either a profit or a loss from the investment made on the basis of whether the option will expire while in-the-money. It is a trade that involves using speculation on the price of the principal asset that has a risk attached to it, banking on the probability of either receiving a profit or suffering a loss.

Binary options are dependent on the result that comes about from a yes or no proposition that is made during a trade. This is where the name binary is derived from. These options operate with an expiry time or date. During the time of expiry, the underlying asset price should be on the correct side of the strike price as per the trade made in order for the trader to earn a profit.

A binary option is automatically debited or credited to the account of the trader after the expiry of the option.

How Binary Options Trading Works

Binary options trading isn’t hard to understand. It’s a simple concept. If, for example, product JKL will have its share price ranging above $700 at 1300hrs on the 1st of July, 2020, the person making the trade needs to make a valid prediction, that is, that it will be above or higher, or below or lower.

Assuming the trader makes the prediction that the price will be above $700 at that predefined moment and places an investment bet of $1000 on it, if JKL’s share price trades above $700, the trader will be in-the-money and will receive a profit based on the set terms of the trade.

So if the set payout was 80%, the binary broker will credit the trader’s account with $800 as the profit earned. If, on the contrary, the share price trades below $700 at that predefined time and date, the trader’s prediction becomes wrong and he or she loses the $1000 initial investment bet money placed in the trade.

Variances Between Binary Options and Vanilla Options

Some traders find it hard to differentiate between binary options and vanilla options. Vanilla options are financial instruments that give holders the right to buy or sell underlying assets at the set price within a set timeframe. It is, essentially, a call or put option.

Vanilla options give the buyer the potential ownership of an underlying asset. Traders are subjected to a fixed risk when buying these options but the profits do vary based on the price movement of the underlying asset.

Binary options, on the other hand, have no provision for a trader to take a position in an underlying asset. These options have an unchanging maximum payout. The maximum risk is limited only to the amount invested by the trader in the option. The movement of the price of the principal asset does not in any way affect the payout made or the loss incurred.

The profit gained or loss incurred are therefore determined by whether the principal asset price is on the accurate side of the set strike price.

Some binary brokers do provide the provision for binary options to be closed before expiry. This, however, greatly reduces the payout received if the option made is in the money.

Benefits of Binary Options Trading

Binary options are an ideal way of trading for people who desire to interact with different asset markets that have a fixed risk and reward. The fixed risk in the binary options is what makes them highly advantageous. Risk management has often been a stress factor for many traders who engage in broad financial markets.

Being able to identify risk and control it provides a trader with more room to speculate on price movements and, in the long run, make successful trades. This is what binary options trading offers to interested traders.

Binary Options Regulations

Binary options are traded on platforms that are under the Securities and Exchange Commission (SEC) regulation among other governing agencies. However, most of the binary options trading is not done in the US and as such may not be regulated. Owing to this factor, some binary brokers do operate without regulation and in turn, fail to adhere to the required ethical standards.

It’s important, therefore, to ensure that you trade with a broker that is licensed, vetted, and well-rated as genuine, to avoid potential frustration, losses, and fraud. Bear in mind that you are investing your money in an effort to earn a profit from it. It’s advisable that you trade with brokers such as 24Option who are genuine and trusted.

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