Binary options are trading instruments that allow you to trade the fluctuations in prices in a variety of different global markets. However, before you trade binary options, it is important to learn about the rewards and the associated risks of trading. Each of the available options can offer different risks, fees and payouts compared to traditional options along with a different investment process and liquidity structure.
Binary options are simple contracts that offer fixed rewards at a fixed risk. The term binary is used because there are only two choices traders can make – whether the price of the underlying asset will decrease or increase. In order to trade binary options, you must first choose an asset you are interested in (stock, commodity, index or currency pair) and then decide whether you believe the price of that asset will go up or down by the expiry time. If your prediction is correct you will receive a fixed payout and if your prediction is incorrect you will lose the amount you invested. Usually the returns for these trades range from 70% to 85% depending on the type of option as well as the broker.
There are three main components of binary options that you should understand – strike price, expiry time and payout. The strike price is the price that you enter the trade and this price will determine whether you win or lose the trade. The expiry time is the length of the contract from the time it opens until the time it closes – this can range from 60 seconds to a month or longer. Most binary options traders use expiry times between 60 seconds and 1 hour. The payout is the return you will receive from your broker when you win a trade. Sometimes binary options brokers also give you a percentage (usually around 10%) of your initial investment back even if you lose the trade.
There are several benefits to trading binary options and the most obvious advantage is that you know exactly what your risks/rewards are. The magnitude of the price movement in the market does not affect the outcome – only the direction of price movement determines if you win or lose. There are only two possible outcomes in a binary options trade, you either lose a fixed amount or win a fixed amount.
In addition, most binary options brokers do not have any fees or commissions that you need to pay in order to trade thereby saving you some money. Another benefit of trading binary options is that they are very easy to manage and you only need to decide if you think the price will increase or decrease.
With binary options, there are also no liquidity concerns because traders do not purchase the asset. This means that brokers can offer a wide range of different expiry times and strike prices which are able to satisfy any trader. Lastly, binary options allow you to trade any type of asset in virtually every global market – there are almost always trades taking place in the world of binary options.
One thing that you will need to consider when trading binary options is that with high-low options the reward is usually less than the risk. You will need to have more successful trades than losing trades so you can cover the losses. The risk will be different depending on which broker you are trading with but it is important to learn how to maximize your profits so you can mitigate your risk.