Binary or digital options are categorized as exotic options. An alternative to traditional speculating and hedging, they are simpler to use and their trading concept easier to grasp. It involves predicting the fluctuating movement of different global markets. There are risks, albeit minimized, and there are also rewards. Traders need to understand what these are in order to competently play the market.
Binary options are sometimes also called fixed return options. A trade is based on the presence of factors such as an expiry date or time, and a strike price. How does one trade in binary options? The following scenario depicts the steps of the binary options trading process and functions as a basic binary options tutorial.
You watch the market and base your prediction on various analyses. The prediction is that the market is going higher, so you decide to purchase a “call” option (what to buy if you think the market is rising; you buy a “put” option if you think the market is going down) on an instrument. This asset is currently at a certain price, so, through a broker, you find a binary option that offers that particular strike price expiring at the end of the day. There shouldn’t be any difficulty in finding binary options to buy since there are all sorts of time frames (anything from mere minutes to actual months) and strike prices. In your case, the binary option you purchase offers a 70% payout if the price is above the strike price, and a 90% loss if the price is below it.
Investment amount depends on the trader; however, brokers generally set minimum and maximum amounts, which vary from one broker to the next. You choose to invest $100 in a call option that will end in 30 minutes. You cannot exit the trade or cash out before this time. If the price at expiry is higher than the strike price, you gain $70; if it’s lower, you lose $90. On the occasion that the price at expiry equals the strike price, you may or may not get your entire amount back; it really depends on the rules laid down by your broker.
Trading binary options is an ideal start for somebody who wants to dip his or her toe in speculating and hedging. The risks are lower and traders know exactly how much they’re going to win or lose. Remember though, at the end of the day it’s important for any investor to know all the factors involved, how they work, and, more importantly, how they influence the success of a trade.