Are you looking forward to engaging in binary options trading? Well, if that is the case then it is wise to take some time first and try to understand what this particular trade is all about. Seek to understand what it is, what goes on in this trade, the advantages, risks and challenges involved, terms of the trade and how you can make the best out of it to name but a few. All this is crucial information that you must have before pumping your money into this trade.
In this article, we are going to look at the following factors in order to make you better understand what a binary options trading really is;
- “Call” and “put” options
- Assets and markets traded in binary options
- Learning how to trade in binary options
- Advantages of binary options trade
- Binary options contracts
In any investment, the investor buys an asset whose value is determined by whether it depreciates or appreciates with time. In the event that the investor sells it at a higher price, then they make a profit and if they sell it at a lower price, they make a loss. In this case, the investor should always be concerned about when to sell the asset so that they can make a considerable amount of profits.
Binary options are similar to this scenario, only simpler. In binary options, a trader places bids and expects any of the two possible results. That is, they either get some cash or nothing depending on how their bid fares.
“Call” and “put” options
One of the possibilities is that the price of an asset will go up which is known as the “call” option while the other possibility that you will predict on is that the prices will go down which is called the “put” option.
The first step to starting the trade is by choosing the asset that you want to trade with. There are several types of assets for you to choose from such as gold prices and currencies among others. You need to be familiar with the market of the assets you choose so that you can stand better chances of making handsome profits.
Basically, the binary option is just a matter of a simple yes or no answer. For example:
Will the price of oil be above $1000 at 2.00pm?
If you feel that it is yes, then you purchase the binary option but if you feel that it is a no, you sell.
The price at which you will purchase or sell the oil is not necessarily its actual value but rather a percentage between 0 and 100 of its true value. The oil at 1:20pm might be at $1700 where it is priced at 42.50/48.50 where the first figure is the amount you sell at whereas the second figure is the price you buy at. These figures will keep changing throughout the day but settling at 100% if the answer was yes or 0% if the answer was no. The profit or loss that you will have made at the end of the trade will be calculated as the difference between the settlement amount and the opening amount (the price you purchased or sold at).
Assets and markets traded in binary options
There is a wide variety of assets that you can trade in binary options. These include:
- Indices. Examples of these are Nasdaq, Nikkei, Dow Jones and FTSE among others.
- Stocks. This is where you trade shares of different companies such as Coca Cola Company, Google and banks among others.
- Forex. There is a wide range of currencies combinations like USD, GBP, AUD and JPY.
- Commodities. These are valuable assets such as gold, oil, silver, coffee and corn among others.
- Bitcoin. This is the famous crypto currency which does not have any physical delivery of the product purchased.
- Events. You can trade on the major events that are happening in the US and how they will affect various economic features such as the Fed Funds Rate event.
Learning how to trade
There are several academies as well as other learning resources that are available for new traders which will help them in honing their trading skills. They involve strategies and techniques that you are supposed to learn, follow and employ while trading. However, you will, in some cases, rely on feelings and luck to win a trade.
Advantages of binary options trade
- Binary options trade has fewer risks compared to many other trades.
- There are short term contracts which mean that you are not stuck with them if you do not want to. The shorter the contract, the more flexible it is and the easier it would be for you to leave or exit. These contracts range between 20 minutes to 1 week.
- There is low collateral that is needed for you to trade. They are priced at between $0 and $100.
Opening your trading account is free. The only amount you are required to deposit is the amount that you are going to trade with and this can be as low or as high as you want it to be.
Binary options contracts
- Based on the expiration times
Intraday: these expire within the trading day
Daily: these expire within 24 hours after the listing
Weekly: these expire after 7 days after the listing
Event based: they expire at a specified time and day in the future
- Based on the expiration value
Indices and commodities usually take the last 25 prices in the market. Remove the last and the first five. Take the average of the remaining 15 and then round up to one decimal point after the exact value in the market.
In forex trading, take the last 10 middle prices then eliminate the 3 highest and the 3 lowest values. Take the average of the remaining values and round them up to one decimal point.
Events go with the expiration value that was released by the reporting organization.
For Bitcoin contracts, the expiration value is the last value just before it expires.
These contracts are settled in cash where there is an all or nothing payout. If you achieve the contract, you get 100% of the amount but if the contract is not achieved then you get 0%. You can close a contract before it expires for you to collect the profits or reduce the losses.