What is binary trading

What is binary trading

Binary Options Explained

With every binary option trade you make you are relying on 3 basic and equally important components: The underlying asset, the binary option contract and the prediction, or forecast, we thought we’d take some time to explain these crucial elements to clear up any possible confusion and get you better acquainted with the basics of binary options. By the time you finish reading this short article you will have an answer to the question: What are binary options?

The Underlying Asset

Nearly all binary option platforms are able to offer a wide variety of assets for you to trade, these assets can include anything from commodities and stocks through currency pairings and indices from all over the globe, as a trader you can choose to invest in a diverse portfolio that includes multiple options or you can choose to invest your knowledge and funds in a specific selection of assets or markets, both are great ways to turn a profit.

The Binary Option Contract

Binary option contracts typically last anywhere from one hour to one month, but offers traders the ability to buy contracts that are even shorter-term—down to five minutes before they expire. To make accurate predictions, it is important to know exactly how much time is left before an option expires

The importance of the contract’s duration cannot be overstated – an intelligent trader must always account for the time remaining before the contract’s expiry to make a more educated prediction or forecast.

The Forecast or Prediction

The job of a trader or investor is to determine which direction the price of an underlying asset will move before its option’s time of expiration. Traders who believe that an asset price will rise should buy a Call option. Traders who believe that an asset price will fall should buy a Put option. Correct predictions can earn traders high returns that nearly double their investments.

Just as you would in any other position, as a trader you have responsibilities, the most important one being the forecast or prediction, this is where fortunes can be won – determining the direction an asset’s price takes prior to expiring.

If you see the price rising above its current level go ahead and purchase a “call” option on your asset, and if you think the market is about to go down, you would be better served by buying a “put” option.

Making the correct prediction is your way of insuring profits, possibly even doubling your initial investment in some cases.

Unique Features

There are many advantages to trading binary options in a digital way but the two main ones are “Close Now” and “Roll Over”, both were created to give you an ability to better manage your risk on any given trade.

Close Now

You could be the best trader around, but everyone sometimes makes mistakes, read the market incorrectly and simply make a bad investment, to that end, we are providing you a “close now” option which will allow you to cancel a trade prior to the expiry time. You can choose to close an option for any reason, but most often this is done because your chosen asset is not behaving in a way that is what you expected.

Let’s assume you purchased a 3 hour call option when suddenly, halfway through the contract term the price starts to collapse after initially making some gains, at that point, you could use the “close now” feature to insure yourself at least a portion of the profit, regardless of how it performs the rest of the way.

If things go entirely the other way on a trade, you can use the “close now” feature minutes into a trade, and cut potential losses before they turn catastrophic.

Roll Over

The exact opposite of “close now”, the “roll over” feature was built so that you can extend an option’s expiry time, which will afford you more time for your selected option to finish in-the-money.

If you got yourself a nice little 1 hour put option on crude oil with the belief that the price is about to trend downwards and 15 minutes before expiry the price reverses direction and begins to make a small upward correction, taking you out of your winning position you can, for a small payment, extend the expiration time and give your black gold an option to resume its downward direction, giving you ample chance to finish in-the-money.

Source: https://www.ticktacktrade.com/what-are-binary-options

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You know the saying: Don’t try to time the market. But binary options trading does just that. The investment strategy is frequently compared to gambling, for good reason: Investors are placing a bet on how a market or asset will move in the very near future.

What are binary options?

Binary options are often referred to as “yes or no” investments. If you think an asset will be above a set price, you’re predicting “yes” and buying the binary option. If you think an asset class will fall below a set price, you’re predicting “no” and selling the binary option.

There’s a low barrier to entry. A binary option contract won’t cost more than 0. You’re not buying the underlying investment or even the option to buy the underlying investment. You’re simply placing a bet on how that investment’s price will move.

These contracts always close at either

binary optionall-or-nothing optionsdigital optionsfixed return optionsFROs

Regulation and compliance

The Cypriot regulator also temporarily suspended the license of the Cedar Finance on December 19, 2013. The decision was taken by CySEC because the potential violations referenced appeared to seriously endanger the interests of the company’s customers and the proper functioning of capital markets, as described in the official issued press release. CySEC also issued a warning against binary option broker PlanetOption at the end of the year and another warning against binary option broker LBinary on January 10, 2014, pointing out that it was not regulated by the Commission and the Commission had not received any notification by any of its counterparts in other European countries to the effect of this firm being a regulated provider.


Exchange-traded binary options

Example of a binary options trade

At 2:00 p.m. the EUR/USD price is 1.2490. The trader believes this will increase, so he buys 10 call options for EUR/USD at or above 1.2500 at 3:00 p.m. at a cost of each.

The risk involved in this trade is known. The trader’s gross profit/loss follows the "all or nothing" principle. He can lose all the money he invested, which in this case is x 10 = 0, or receive 0 x 10 = ,000. If the EUR/USD price will close at or above 1.2500 at 3:00 p.m. the trader's profit will be the payoff at expiry minus the cost of the option: ,000 – 0 = 0.

In this example, at 3:00 p.m. the spot has risen to 1.2505. The option has expired in the money and the gross payoff is ,000. The trader's net profit is 0.

Black–Scholes valuation

σ {\displaystyle \sigma }Φ {\displaystyle \Phi }

Cash-or-nothing call

This pays out one unit of cash if the spot is above the strike at maturity. Its value now is given by

Cash-or-nothing put

This pays out one unit of cash if the spot is below the strike at maturity. Its value now is given by

Asset-or-nothing call

This pays out one unit of asset if the spot is above the strike at maturity. Its value now is given by

Asset-or-nothing put

This pays out one unit of asset if the spot is below the strike at maturity. Its value now is given by

American style

T {\displaystyle T}K {\displaystyle K}K ≥ S {\displaystyle K\geq S}K ≤ S {\displaystyle K\leq S}

K < S {\displaystyle K<S}K > S {\displaystyle K>S}T {\displaystyle T}

erf {\displaystyle \operatorname {erf} }sgn {\displaystyle \operatorname {sgn} }

Foreign exchange

r F O R {\displaystyle r_{FOR}}r D O M {\displaystyle r_{DOM}}

In case of a digital call (this is a call FOR/put DOM) paying out one unit of the domestic currency we get as present value,

In case of a digital put (this is a put FOR/call DOM) paying out one unit of the domestic currency we get as present value,

While in case of a digital call (this is a call FOR/put DOM) paying out one unit of the foreign currency we get as present value,

and in case of a digital put (this is a put FOR/call DOM) paying out one unit of the foreign currency we get as present value,


σ {\displaystyle \sigma }σ ( K ) {\displaystyle \sigma (K)}

C v {\displaystyle C_{v}}

σ {\displaystyle \sigma }K {\displaystyle K}

The first term is equal to the premium of the binary option ignoring skew:

∂ C v ∂ σ {\displaystyle {\frac {\partial C_{v}}{\partial \sigma }}}∂ σ ∂ K {\displaystyle {\frac {\partial \sigma }{\partial K}}}

Relationship to vanilla options' Greeks

Since a binary call is a mathematical derivative of a vanilla call with respect to strike, the price of a binary call has the same shape as the delta of a vanilla call, and the delta of a binary call has the same shape as the gamma of a vanilla call.

See also

  • Options strategies
  • Options spread
  • Options arbitrage
  • Synthetic position
  • Prediction Market


External links

  • CFTC investor alert

Source: https://en.wikipedia.org/wiki/Binary_option

or 0; you either win or lose. If you predict the price movement correctly, you’re on the winning side of the trade, and the person on the other end of the contract — who predicted incorrectly — is on the losing side. Your earnings or losses can’t top 0 on a single contract, which means your exposure to risk is limited.

Limited, but far from nonexistent. You can trade multiple contracts to increase potential profits; the less fun side of that coin is that you’re also increasing potential losses.

Assets that can be traded as binary options

In general, you can trade on:

  • Stock indexes, like the S&P 500, Nasdaq, Russell 2000 and FTSE 100.
  • Forex (currency pairs).
  • Commodities, like precious metals, crude oil, natural gas, soybeans and corn.
  • Individual stocks.
  • Economic events, like the federal funds rate or the jobs report.

How binary option trades work

To place a binary option trade, you’ll walk through three main steps:

  1. Decide on an asset or market to trade.
  2. Decide on an expiration date or time for the option to close. Most trading platforms let you sort by expiration date, so you can view contracts that expire within the next few hours or days. Most contracts will expire by the end of the trading week, except those tied to economic events.
  3. Decide if you want to buy or sell the binary option, based on the strike price and expiration date. The strike price is essentially a line in the sand. If you think the asset will be above the strike price when the contract expires, you buy the binary option. If you think the asset will be below the strike price, you sell the binary option.

Say you want to trade on the S&P 500, and you choose a contract with a strike price that’s slightly higher than where the market is right now. That strike price is 2,075, and the expiration is 3 p.m. Remember, in binary options trading, you’re deciding whether you think an asset will be above or below the strike price at a certain time. The question here: Will the S&P 500 be above 2,075 at 3 p.m.? If you think the answer is yes, you buy the option. If you think the answer is no, you sell the option.

Here’s where things get complicated: As with many investments, there’s a bid price and an offer price, and they can fluctuate rapidly. With binary options, the bid is used when you’re selling a contract, and the offer is used when you’re buying a contract.

The bid and offer prices are always under 0. Let’s say that in our hypothetical trade, the bid on the S&P 500 contract is and the offer is . If you buy the binary option, you’ll pay the offer price. If you sell the binary option, you’ll sell at the bid price. You think the S&P 500 will be above 2,075 at 3 p.m., so you buy the binary option contract for . That’s the most you can lose in the trade.

  • If you bet correctly — and this is, at its heart, a bet — the binary option settles for 0. Your profit is , since you put the offer price of down (which you also get back). You’re now “in the money” in options lingo, for obvious reasons.
  • If you’re wrong, and the S&P 500 is lower than 2,075 at 3 p.m., the trade settles for

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    . You don’t get anything, and you’ve lost the you put down. You are now, sadly, “out of the money.”

If instead you think the S&P 500 will be below 2,075 at 3 p.m., you’d sell the binary option.

  • If you’re correct, your profit is the bid, or the price at which you sold the option, which was .
  • If you’re wrong, and the S&P 500 goes higher instead, you lose (0 less the bid).

You can also exit the trade early at some brokers, which will cut your losses if your prediction looks to be wrong, or lock in a profit if your prediction appears to be trending toward correct.

But wait, back up: How do you make this prediction?

Therein lies the issue. It’s hard to predict the markets. If it were easy, we’d all be swimming in 0 bills. The key here is research. You’re not making a blind prediction, at least not if you want to make money. The goal is to make what your elementary-school science teacher probably called an educated guess. To do that, you should:

  • Practice with a binary options demo account if you’re new to this trade strategy. The losses you take when you’re green won’t sting as badly if they’re paper money.
  • Understand the market you’re trading. We’d recommend picking a market to trade and sticking to it at first. If you’re into currency trading, trade forex. If you’re already following the S&P 500, trade on that.
  • Use technical analysis tools, like price charts, which will give you a historical view of how the asset you’re trading has behaved in the past and an indication of how it might behave in the future.
  • Keep track of your trades. A trading platform will keep a record of your order history, but a good accompaniment is an old-fashioned notebook. No, it’s not the most advanced trading tool. But keeping notes about your trades — what went wrong, what went right — can help guide future strategies.

As with any investment, there are pros and cons, risks and rewards here. Binary options are marketed as a relatively low-risk trading strategy, but we’d treat it like gambling: Don’t put up more than you can afford to lose.

Source: https://www.nerdwallet.com/blog/investing/binary-options-trading/

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The simplicity of binary option trading attracts a lot of investors. Unlike vanilla options, which can be sold or bought at specified prices on expiration, binary options are automatically executed. However the demand created by this simplicity makes it harder for an investor to choose the right broker. Since all the transactions for binary options are executed over the Internet, it is very easy to come by to a platform that operates outside of regulations and traders are exposed to potential fraud/scams. Also the addition of smartphones makes it even more accessible to place bets on those options.

To secure the initial investment it is important to use a broker that operates within a regulation. To avoid situations like price fixing or withdrawal cancellations, one needs to invest the amount in a trust fund that is assigned through regulations. Usually those funds are monitored by an independent third party who makes it even more trustworthy. Moreover it is important for the broker to provide its customers with the necessary tools like trading software that can work on multiple platforms and transparency clarity when it comes to option choices.

In addition to its simplicity binary options offer a wide variety of financial instruments from stocks to foreign exchange ratios, commodities and index points. Just like Forex trading, trader does not actually need to own an asset. Potential high profitability of binary trading also exposes the traders to high risks by definition. Choosing the right broker is one of the factors that might reduce the exposure to risk.

Source: https://www.fxstreet.com/education/what-is-binary-options-trading-201608120730

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