The nomenclature of binary options trading describes exactly what binary options are all about. Binary options trading is the practice of buying a position in a financial asset in order to predict correctly out of two possible outcomes as provided for each asset.
From this definition, the trading of binary options involves a number of issues:
- There must be a financial asset to be traded.
- There must be two possible outcomes for each type of trade, out of which the trader has to choose one.
- The trader must assume a position on one of the assets and choose an outcome.
- There must be an expiry date for this option, after which the option must be exercised.
What is the meaning of the phrase “binary options”?
The word “binary” means “two”. Therefore “binary options” means “two options”. This is the reason why the structure of the trade requires that a trader must choose one out of two possible options.
Binary options are also known by other names. Binary options are also known as follows:
- Digital options, because they are traded on digital (online) platforms and not on market exchanges.
- Fixed return options, because the returns on any investment in binary options is fixed and is not dependent on the degree or range of movement of the asset in the trader’s chosen direction.
- “All or none” options, because in terms of return, it is either the trader gets all his money back with a profit, or makes no money i.e. loses the initial investment. It is either you get it all, or you get none of it.
The binary options market is not centrally located, as the assets that are traded on the binary options platforms are located on several exchanges and in several geographical locations. For instance, stocks traded on a binary options platform can be drawn from the stock markets in the US, UK, Middle East or Asian exchanges. Typically, binary options platforms are open 24 hours a day.
The principle behind profiting from binary options is simple. Several types of trades which depict variations of outcomes are listed. It is left for the trader to choose from each of these options according to their analysis of how the assets they choose will behave. Each of these behaviours or outcomes on which traders can place trades are based on price fluctuations across a range of assets. These outcomes are described below.
What Outcomes Are Traded as Binary Options?
The following are the outcomes that are traded as binary options:
- Up/Down: This option is also known as High/Low, Above/Below or Call/Put option. Asset prices can go up or down as price fluctuations occur in the market. The trader therefore predicts whether the asset price will go above the market price or below the market price, and set a trade on this basis.
- Touch Up/Touch Down: This option is also known as the One Touch option. Just as asset prices move upwards and downwards, they will take out price levels as they do so. The broker sets one price above market price, and another price below market price. The trader must decide which of the two prices will be touched by the fluctuating asset, if at all this will occur, within the time allocated for the trade.
- In/Out: Prices of assets do fluctuate, but they can sometimes perform such fluctuations within a limited range of prices. The trader has to decide if the fluctuations will continue within a set price range (IN), or if the price fluctuation will break out of this range on either side (OUT).
- Some traders have the need for speed and the binary options brokers realize this. So such traders are given the opportunity to put their speed skills to the test. Will the asset end up or down within 60 seconds, 2 minutes or 5 minutes? These options are known by many names such as Turbo, Hyper or Short Term options.
There are other options which are provided by specific brokers for their own platforms. However, the four trade options described above are found on nearly all broker platforms and it is good that traders master how to trade them.
Peculiarities of Binary Options
Binary options are peculiar and have characteristics which distinguish them from other markets. These are listed as follows:
- All binary options have expiration times. So whatever outcome is chosen by the trader must occur within the time allocated by the broker for the trade before such trades are rendered profitable.
- Binary options are unleveraged. This means that the opportunity to use leverage as is found in forex, stocks or conventional options markets are not available to binary options traders. You can only trade with your money.
- Similarly, there are no margin requirements for binary options as is the case with other markets
- The binary options market is the only market where all asset types are traded. In addition, the trader is at liberty to choose the investment amount. Since the market does not operate on leverage, traders are not required to come up with high margins for certain contracts such as those of crude oil and gold, which are traditionally expensive.
Binary options are traded using binary options brokers. Brokers provide two types of platforms:
- Turnkey platforms, which are designed to be customizable and allow brokers to take pre-existing templates and brand them accordingly.
- Proprietary platforms are built uniquely by each broker so as to reflect some unique trade contracts to be offered to clients.
Traders should as much as possible, use brokers that are licensed to provide binary options trading services.
It is also possible to use value-added services such as signals services and automated trading with binary options robots. BinaryRobot365 is an example of such binary options robot services.
Traders are welcome to trade the binary options market and it is hoped that this article has provided some basic education on what the market is all about.