Financial trading can be a very lucrative and highly profitable method of generating profits from financial markets. It is possible to achieve returns many times in excess of traditional equity buy and hold investments such as shares and bonds over shorter time periods.
Yet for many individuals, the simple label of ‘trading’ can prove off-putting when assessing investment strategies. Trading is commonly associated with highly speculative investments that require both a high level of competence to execute successfully and an even higher tolerance of risk. For many, the perception of trading is that it is somehow beyond them; too complicated, too time consuming and ultimately too risky a place to put their hard-earned cash.
What Is Binary Options Trading?
If a trader believes the market is going higher, he would purchase a "call". If the trader believes the market is going lower, she would buy a "put". In order for a call to make money, the price must be above the strike price at the time of expiry. In order for a put to make money, the price must be below the strike price at the time of expiry. The strike price, expiry, payout and risk are all disclosed at the outset of the trade. The payout and risk may fluctuate as the market moves, since a call that is "in the money" by a great degree stands a good chance of finishing in the money if there is a short time to expiration. Yet, the pay rate out and risk that was locked in by the trader when the trade was taken will stand at expiration. This means different traders, depending on when they enter may have different pay outs.
Binary Option Example
A trader is watching the
market and based on their analysis predicts the market is going higher,
except she is not sure by how much. She decides to buy a (binary) call
option on the S&P 500 index. The index is currently at 1105 and she
finds a binary option through a broker that offers this strike price and
that expires before the end of the day. Since binary options are
available on all sorts of time frames - from minutes to months - and
with all sorts of strike prices, she has no problem finding one to buy.
She finds one that offers a 70% payout if the option expires above the
strike price (call option), but if the price is below 1105 at the time
of expiry she will lose 90% of her investment.
She can invest almost any amount she wishes, although this will vary from broker to broker. Often there is a minimum such as $10 and a maximum such as $10,000 (check with a broker for their investment amounts). The trader invests $100 in a call that will expire in 30 minutes. When the 30 minutes is up, she will know if she has made money or lost. The price at expiry may be the last quoted price, or the (bid+ask)/2. Each broker will specify their expiry price rules, and the trader cannot generally cash out or exit the trade before expiration.
She can invest almost any amount she wishes, although this will vary from broker to broker. Often there is a minimum such as $10 and a maximum such as $10,000 (check with a broker for their investment amounts). The trader invests $100 in a call that will expire in 30 minutes. When the 30 minutes is up, she will know if she has made money or lost. The price at expiry may be the last quoted price, or the (bid+ask)/2. Each broker will specify their expiry price rules, and the trader cannot generally cash out or exit the trade before expiration.
