What Does Binary Options Trading Look Like?
Binary Options Trading is very easy to understand because it has only two possible outcomes and a fixed payoff: you either are right and you win a predefined amount or you are wrong and get zero payoff.
In this last case, your total loss is the amount paid for the option in the first place. Can you see the binary nature of Binary Options?
Binary Options Trading Example #1
It’s 9.00 a.m. and the current EUR/USD rate is 1.2500. You purchase the binary call for 1.2550 with a payoff of 100$, due to expire at 3.00 p.m. Now, only two things can happen:
– if at the expiration time (3.00 pm in our case) price is at or above 1.2550, you receive 100$
– if price is below 1.2550, you don’t receive anything and you lost the cost paid for the option in the first place (this cost varies from broker to broker).
Of course, your profit in case of a win is not 100$, because you already paid the option cost. So the profit is payout (100) minus the cost of the option.
Binaries are designed to be easy to use and that’s why the possible answer is “yes” or “no”. If you think price will touch 1.2550 in our case, your answer is “yes” and you buy the call for 1.2550.
You can Trade Binaries on Forex, Indices or Commodities. They are derivative by nature because the value of an option is derived and strongly related to the underlying stock, commodity or currency pair.
Just like any kind of online trading, Binary Options Trading is risky, but it has its advantages.
The Advantages of Binary Options Trading
Binary options give you a high level of protection.
If a currency pair moves against you, by trading options you can take a smaller loss than if you traded Forex. This is because with binary options trading, you only lose the amount you paid for the option.
Binary Options vs Forex Example
It’s 9.00 a.m. EUR/USD is now 1.2500. Let’s say you bought the call for 1.2550 EUR/USD and you paid for it 30$ and you receive 100$ if at the expiration date (3.00 p.m.) price is at or above 1.2550. But the market disagrees and at 3.00 p.m. EUR/USD is at 1.2410. If you traded Forex, your potential loss at the time is 90$ (assuming you are trading 1$/pip), but if you traded options, your loss is just the cost of the option – 30$.
This is how options can actually protect your capital. Another great advantage of trading binary options is their flexibility.
When you trade Forex and use a stop-loss, if that is hit, you are no longer in the trade and you take the loss. Generally the worst trade is the one that comes against you, reaches the stop-loss to take you out of the trade and 5-10 pips after that, price reverses and goes in your original direction. That’s really annoying.
But with binary options trading, that can never happen because there is no stop-loss. You already paid the option cost and you don’t care how low the price goes before finally going your way.
Of course, there are several other factors to take into consideration: if price goes against you 100-150 pips, it will be hard to reverse and close above your option level. Also, the time factor is an important one: it’s possible that the option will expire within a few pips of your targeted price, on the bad side.
Binary Options are much easier to understand than Forex for a new trader. When you first enter the Forex world, you are overwhelmed by all the new terms, strategies and indicators, but binary options are simple: you only have two possible outcomes.
For more information about Binary Options, Trading, Bonuses, Promotions, and more please visit our Education Center.
If you’re interested in finding out about trading platforms for binary options, we advise you to visit this page.