A binary option is a kind of an option with all or nothing payoff. The payoff can be a fixed asset amounting to a given value or receiving nothing at all. As the term suggests, binary options in this case are also referred to a yes or no propositions.

There are two types of binary options; cash/nothing binary option and asset/nothing binary option. For the cash/nothing option, the cash is at stake while for the asset/nothing option the value of the fundamental security is at stake. In the European style of binary options, they are normally cash settled which entirely depends on an expiry date. At the expiry date, the trader either receives a specified amount when the option settles in the money or receives nothing at all when the option settles out of the money. The two possible outcomes of the binary options enable the trader to either buy a Put/Down option or a Call/Up option. These options are restricted by a time limit to the close from the trade day. The trader has to anticipate the price movement of what is at stake. A Put in binary options, is a prediction of a price drop while a Call is a prediction of a price rise. The trader can carry out current market evaluations that surround the asset of interest to be able to pre-determine the outcome at the close of the trade day. Binary options are a straight forward trade where the trader has to observe the price movement and make the predictions. The risk and reward of binary options are easily pre-determined before the contract is made. An example of a binary option is predicting whether stock price of a company say, ABC will be below $120 by 1800hrs on that day.

Binary options are also known as fixed return options (FROs), all-or-nothing options or digital options. Outside U.S, binary options are mostly offered by brokers who make their earnings from percentage discrepancies resulting from payouts on winning trades and their collections from the losing trades. The binary options for these cases are held until the expiry of the trade period. Within U.S, brokers are not allowed to involve U.S residents in binary options.

Binary Option Advantages

Binary options can be promising to a trader due to the fact that the risks and rewards are known. A careful look at the price movements enables the trader to easily determine either to make a Put/Down or a Call/Up option. Another advantage to the trader is that no fees are paid in terms of commissions, but in some cases it entirely depends with the broker arrangements. Trading strategies are available for the traders which enable them to carry out analysis on the market changes. These resources help traders increase the accuracy of their predictions. Binary options provide traders with a wider opportunity and flexibility to make investments since the contracts have short-term durations. Where a trader is able to make great payoffs, he/she has an opportunity to make more investments in binary options.

Binary options are traded on platforms under regulatory agencies. However, there exist platforms over the internet not governed by the regulatory agencies which expose the investors to great risk of losing out on their money. A major drawback of binary options is that rewards are much less as compared to the risks which mean that when an investor loses on a trade, it costs the trader more as compared to the returns from the winning trades. In cases where brokers are entirely in control, trade discrepancies are not catered for and may be a bad investment for an investor engaging in binary options.

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Last Update on 01/06/18