What Are Binary Options and how to Trade Binary options?
Binary options are trading options that require you only to forecast the direction of the future price movement. If your prediction gets right at the time of expiry, you will gain a fixed payout. However, if your prediction gets incorrect then you will lose your primary investment. Binary options are some of the simplest trading options that are available in financial industry; because as a trader you know exactly what you are going to get, and what you are going to lose.
How to Trade Binary Options?
The most familiar binary option is a “high-low” option. Enabling access to stocks, commodities, indices, and foreign currencies, a high-low binary option is also identified as a fixed-return option. This is because the option has an expiry time/date and also what is called a strike price.
If a trader believes the market is rising, he/she would buy a “call.” Alternatively, if the trader believes the market is falling, he/she would go for a “put”. For a call to gain profits, the price must be climbed above the strike price at the expiry time. For a put to gain profits, the price must be reached below the strike price at the expiry time.
The strike price, payout, expiry, and risk are all available at the trade’s outset. For common high-low binary options outside the U.S., the strike price is basically the current price or rate of the underlying financial assets, such as the S&P 500 index, GBP/USD currency pair or a particular stock. Thus, the trader is predicting whether the future price at expiry will move higher or lower than the strike or current price.
Binary Options vs. Traditional Options
Binary options are not unlike traditional options because the payout is based on the price of an underlying asset at the expiry time. Yet, traders only need to accurately predict the future direction of the price movement rather than the size of that movement while trading binary options.
The basic difference between binary options and traditional options are the gains and losses. Binary options give a preset rate of return and a loss of your initial investment. Conversely, with traditional trading options the profits can be limitless which makes them much riskier than binary options.
3 Types of Binary Options
HIGH LOW: The most simple and popular type of binary option, all the trader need is to predict the price direction with one decision: will the market price at the time of expiration move higher or lower than the strike price offered? And the payout for each trade is fixed and disclosed to the trader.
ONE TOUCH: In the One Touch option, a boundary line is determined above and below the current rate. The trader decide whether the boundary above or below and if the market price hits the boundary line before expiration time, the trade will be in the money.
RANGE OPTION: The Range option is mostly to predict the possibility of whether the asset and option price chosen by the trader will be in the preset range by the time of expiration.