Tips
- Know the underlying asset - Binary Options derive their financial
value from underlying assets.Before investing in a Binary Options, make
sure you understand the underlying asset, are familiar with the relevant
financial markets and where the asset is traded. Example: Silver
Futures are listed on NYMEX/COMEX.
- Know how to interpret a Binary Option price - The price at which a
Binary Option is trading is an indicator of the chances of the contract
ending in-the-money or out-of-the-money.
- Know when to get out of a position - An intuitive trader acts
promptly when he feels that his binary contract is going to end
out-of-the-money at expiration. Example: You have a $75.00 Silver
contract that you feel is not going to expire in-of-the-money. Instead
of holding it until expiry, selling it at $30.00 and neutralizing your
open interest will help you manage the loss (i.e. $45.00 instead of
$75.00).
- Understand the relationship between risk and reward - Risk and
reward go hand-in-hand in binary option trading. The more the risk or
unlikelihood of a particular outcome occurring, the greater the reward
associated with it. An intelligent investor understands and weighs each
contract on these two matrices before taking a position in a contract.
As an example, an investor who follows foreign currency movements senses
that the USD is gaining ground against the YEN and wants to hedge his
risk and try to protect his Japanese investment from dropping in value.
He may do this by buying 10,000 binary contracts on HedgeStreet, which
are “USD/YEN rate will be above 119.50” by 4:00 PM ET tomorrow. If his
analysis is correct and the USD gains ground over the Yen, rising above
119.50, the 10,000 binary contracts will expire in-the-money, yielding a
total payout of $1,000,000. If he paid $75 per contract, he will make
$25 per contract, which is a $250,000 total profit - a 33% rate of
return on his investment. However, if the Yen did not end above 119.50,
the 10,000 binary contracts will expire out-of-the-money. In this case,
the trader would lose his initial investment on the binaries, but would
be compensated by the gain in value in his Japanese investments.
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CRUDE OIL Binary Options
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Crude oil is a very actively traded market, even among day traders. Binary options on crude oil provide a relatively low-risk
way to trade short-term movements in this exciting market.
At right is an example of above/below one-hour binary options on crude
oil as they would appear on an online trading platform.
The price is not the spot price of crude oil but the price of the nearby
futures contract. Thus, with a binary option, you have the
same exposure as trading the futures but without having to pay the
futures margin requirement. The options have a 85/0 payout*.
They were available starting at 3:00 p.m. (ET) and can be bought at any
time up to ten minutes prior
to expiration at 4:00 p.m. The blue line shows the price history of
crude oil
over the life of the options thus far.
The current crude oil price is $97.473. If the investor anticipates
that, at option expiration, crude oil
will be above the current price (the light green shaded area on the
chart), then
the investor will click on the green CALL button to invest in the binary
call option that locks in the current price. After so doing, the
customer need only wait for the option to expire. If the binary call
option expiration price is
above
the customer's
locked-in price, then the binary call option will return the maximum
payout, in this case, the initial investment plus 85%. If not, then
all of the initial investment will be lost.
If, on the other hand, the investor anticipates that, at option
expiration, crude oil
will be below the current price, then
the investor will click on the orange PUT button to invest in the binary
put option that locks in the current price. After so doing, the
customer need only wait for the option to expire. If the binary put
option expiration price is
below
the customer's
locked-in price, then the binary put option will return the maximum
payout, in this case, the initial investment plus 85%. If not, then
all of the initial investment will be lost.
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GOLD Binary Options
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Gold continues to dominate the investment headlines around the world.
With gold binary options, you can trade short-term movements
in the price of this precious metal while risking as little as U.S. $50.
At right is an example of above/below one-hour binary options on gold as they would appear on an online trading platform.
The price is not the spot price of gold but the price of the nearby futures contract. Thus, with a binary option, you have the
same exposure as trading the futures but without having to pay the futures margin requirement. The options have a 71/5 payout*.
They were available starting at 3:00 p.m. (ET) and can be bought at any time up to ten minutes prior
to expiration at 4:00 p.m. The blue line shows the price history of gold
over the life of the options thus far.
The current gold price is $1515.703. If the investor anticipates that,
at option expiration, gold
will be above the current price (the light green shaded area on the
chart), then
the investor will click on the green CALL button to invest in the binary
call option that locks in the current price. After so doing, the
customer need only wait for the option to expire. If the binary call
option expiration price is
above
the customer's
locked-in price, then the binary call option will return the maximum
payout, in this case, the initial investment plus 71%. If not, then
the customer will receive 5% of the initial investment meaning that 95%
of the initial investment is lost.
If, on the other hand, the investor anticipates that, at option
expiration, gold
will be below the current price, then
the investor will click on the orange PUT button to invest in the binary
put option that locks in the current price. After so doing, the
customer need only wait for the option to expire. If the binary put
option expiration price is
below
the customer's
locked-in price, then the binary put option will return the maximum
payout, in this case, the initial investment plus 71%. If not, then
the customer will receive 5% of the initial investment meaning that 95%
of the initial investment is lost.
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Forex Binary Options
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Binary options provide a simpler and relatively less risky way to trade forex. And since the forex
market is the most liquid market in the world, there is active price action essentially around the clock.
At right is an example of above/below one-hour binary options on the
EUR/USD foreign currency exchange rate as they would
appear on an online trading platform.
The options have a 81/0 payout*. They were available starting at 6:00
a.m. (ET) and can be bought at any time up to ten minutes prior
to expiration at 7:00 a.m., after which time
new options will be available for trading over the subsequent hour. The
blue line shows the price history of
the EUR/USD exchange rate over the life of the options thus far.
The EUR/USD current price is 1.40885. If the investor anticipates that,
at option expiration, the EUR/USD exchange rate
will be above the current price (the light green shaded area on the
chart), then
the investor will click on the green CALL button to invest in the binary
call option that locks in the current price. After so doing, the
customer need only wait for the option to expire. If the binary call
option expiration price is
above
the customer's
locked-in price, then the binary call option will return the maximum
payout, in this case, the initial investment plus 81%. If not, then
all of the initial investment will be lost.
If, on the other hand, the investor anticipates that, at option
expiration, the EUR/USD exchange rate
will be below the current price, then
the investor will click on the orange PUT button to invest in the binary
put option that locks in the current price. After so doing, the
customer need only wait for the option to expire. If the binary put
option expiration price is
below
the customer's
locked-in price, then the binary put option will return the maximum
payout, in this case, the initial investment plus 81%. If not, then
all of the initial investment will be lost.
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HOW TO TRADE BINARY OPTIONS
WHAT ARE BINARY OPTIONS?
A binary option, also referred to as a digital option, has only two
possible outcomes each of which pays out a fixed return
depending upon whether a certain condition is fulfilled by the time the
option expires.
For example, a binary option that has percent payout of 75/10 means
that, with an initial investment of U.S.$100, the customer will receive
$175 if the condition is met (and the option expires in-the-money) and
$10 if the condition is not met (and the option expires
out-of-the-money).
In the latter case, the net cost to the customer is $90.
Binary options are a novel type of investment vehicle that are rapidly becoming
a favorite among beginning investors because they have limited risk and are simple to understand.
Binary options typically expire in an hour, giving you the opportunity to earn a high return over a very short time period.
WHY TRADE BINARY OPTIONS?
