Binary options serve to simplify trading decisions by only having two outcomes, you win or you lose. With binary options we do not have to worry about the amount an asset moves, just that it does move enough. Many people find this more simplified type of trading to be very appealing and this serves to bring a lot of new people to trading.
Options allow us to trade in securities which give us the opportunity to bet on the future price of an asset and also to buy or sell short the underlying asset upon expiry if we wish. Unless there is an advantage to exercise the option, it will not make sense to do so and the option does not have any value at expiration in these cases.
In exchange for this opportunity, whereby the options seller takes on the risk of the option being exercised and their covering the difference, options buyers will pay the seller a premium, the cost of the option essentially. Options are priced in relation to both the probability of their being worth something at expiration and the extent of this possible value.
Standard options are used both for speculation, where the buyer expects to make a profit on the options or at least hopes to, and for hedging purposes, to offset possible losses in the holding of the underlying asset, such as those long the stock market and buying put options which gain if the price of the asset optioned declines enough during the life of the option.
While the value of standard options varies depending on the performance of the underlying asset, binary options only address whether the it is at or over its strike price at expiration, or other conditions related to the price of the underlying asset being met, such as trading within a given range during the option period or it touching a certain price.
This serves to simplify options buying and holding over trading standard options, where valuations can be pretty complicated indeed. Standard options are the most complicated thing one can trade, where binary options are the opposite, the simplest, since we are not dealing with questions such as how far an optioned asset will move, just that it does move in the manner required by the option.
The Element of Time with Options
Learning to trade anything successfully is a pretty challenging task, and the more complicated the trading is, the more difficult it is to master. There are many traders who trade standard options successfully, but in addition to the normal magnitude considerations that traded assets all are concerned with, standard options also introduce the variable of time.
It is not enough to expect that the price of something will go up, like for instance with buying a stock, and with stocks and most other assets there is no time limit on a move that you are anticipating, and people hold stocks for years for speculation purposes.
Futures trades do have a time limit of sorts but due to the ability to roll over contracts, this really isn’t a genuine limit, and someone can hold a futures position for years if they wish. Few futures traders do this but they could, so there is no essential time limit to these trades as well.
All options have hard limits to them though, as they must due to their nature, as they are positions taken only for specified times. The risk that the option writer or seller must take on does need to be limited to a specific amount of time in order for them to be able to manage their risk.
Binary options do involve the element of time as all options do, and the simplification that they introduce into options trading is not having to worry about the magnitude of the move beyond achieving the desired target needed for the option to pay out.
This is a bigger deal than it may appear, because a lot of the complexity of options is not so much what they may be worth at expiration, but what they may be worth now, given that they are traded. These calculations do involve both the time left as well as how the price of the asset is moving, which can be moving up with the option price being stagnant or even moving in the opposite direction.
With binary options, traders are focused not on the journey, but on the final result, for the most part anyway. Some binary options can be traded prior to expiration but the great majority of binary options traders do not concern themselves with such things and instead seek the simplicity of the hit or miss format of these trades.
Binary options get their name from the result either being a yes or a no, a win or a loss, where you win a fixed amount or lose your stake, your bet so to speak.
Are Binary Options Like Betting in a Casino?
Binary options have simplified options trading so much that some consider it to be akin to casino gambling. They may cite the fact that traders need to win more often than they lose to break even, which is true, and the fact that these bets so to speak are either win or lose like a bet on red and black on a roulette wheel to make it similar to doing just that in a casino.
This is not the case at all and the reason is that casino gambling guarantees a house edge, where in the long run the house always wins as they say.
What distinguishes these two forms of wagering, if you will, is that roulette and other casino games are games of chance which rely on a house advantage of probability. Binary options on the other hand is a game of pure skill. The house advantage so to speak here with binary options is the costs of trading, and yes, you always need an edge to overcome that, whether that be with stock trading or anything else.
Things like stocks and futures involve commissions and spreads, as well as other costs of trading such as exchange fees and the like, and we need to make enough of a profit on our trades to overcome this. Even forex and contracts for difference trading, which do not have commissions, require us to have an edge large enough to cover the spread to break even.
With binary options, these trading costs are built into the payouts. While these payout rates differ depending on your broker, and we do need to pay attention to closely in order to give ourselves the best chance to succeed, we are going to have to be ahead to make money from our binary options trades.
Typically, binary options traders need to win about 56 trades out of 100 to break even, with one’s profit being measured by how much we may be able to beat this number. Less than 56 out of 100 will mean losses to the trader.
This number is not only possible to beat, there are many binary options traders who achieve this consistently and make money on this form of trading. While we need to become good enough to win this often, if we can manage this, we can beat the house so to speak and show a real profit.
Succeeding with Binary Options Trading
The potential advantage that a binary options trader has is the fact that the prices of securities do move in discernable manners and being on the right side of these moves is how all successful traders make money.
We do need to appreciate that none of this is really that intuitive or easy and if we want to become a good binary options trader or any sort of successful trader this will require a real commitment and real effort to achieve.
People don’t just start out making money trading binary options very often, and do have to learn how to distinguish and analyze potential trades well enough to be on the right side of the trades often enough, but binary options trading is easier to learn and to master than many other forms of trading, which is certainly an advantage to newer traders looking to learn.
This is nowhere near as simple as it may appear to many newer binary options traders though, and knowing where something may be at the end of the contract is not just a matter of taking its present direction and just assuming that the move will continue. This is especially true if the contract is longer, where the further out we’re looking to predict the price of something, the more difficult this task becomes, due to more intervening factors and more time for changes in momentum to occur.
There is a lot to being right enough to make a tidy profit with binary options trading, and there’s also quite a bit to managing your money and deciding how much risk to take on per trade. When you lose a binary options trade, you lose all of the money you put up for it, so it’s very important to not choose to trade too big or trade without enough of a bankroll to not be able to handle the ups and downs of the distributions of probability that occur with trading.
The first order of business is to get good enough to have a trading advantage trading binary options, and we also need to make sure that we’re going to be around long enough to develop sufficiently to get to that stage, however long it may take.
Succeeding in trading involves a strong commitment to success as well as taking measures to ensure that we’ll be still trading when we finally attain the proper skills to succeed, and succeeding at binary options is no exception.
While binary options may be easier to learn, this does have to be learned sufficiently. Many wise traders start out on a demo and only put real money on the line when they are at least fairly confident that they have a positive and not a negative expectation at a given point in time in their trading development.
For those serious about binary options trading, those who have a goal of making a profit from this form of trading eventually, it only makes sense to risk your capital when you at least are more likely to win than lose.
Those who may wish to trade binary options as a diversion, and mostly focus on being entertained like one would if they gambled at a casino, may not desire such a systematic approach and may not even be interested in trading with play money on a simulator.
That’s perfectly fine, as long as we understand that we need to decide which type of trader we are and if we are indeed serious about this, we need to approach binary option trading the right way, with a firm commitment to success and the right amount of patience to allow us to get where we want to be.
Binary Options FAQs
How do binary options work?
Binary options involve betting a certain amount of money on a financial event happening or not. If the event happens, you collect, and if it does not, you lose your bet. The options are almost always held until the expiration date and are therefore all or nothing propositions, which makes them a lot simpler than standard options.
Can you really make money with binary options?
Making money with binary options involves winning a higher amount of your bets than you lose. Break-even percentages with binary options are generally in the mid 50’s, such as winning 55 and losing 45. This requires a fair amount of skill to achieve but some traders do exceed this percentage and make a profit.
Is binary options trading safe?
If you do not have the requisite skills, you can lose all of your money trading anything, including binary options. We need to establish a trading advantage first, and then manage the size of our positions so that bad luck doesn’t do us in. Trading with a reputable binary options dealer is also of prime importance.
How do you successfully trade binary options?
Trading is never a guessing game, and random selections will always result in your losing money over time due to trading costs. Financial instruments do move in fairly predictable patterns though and the goal is to trade these trends to put yourself in a position to win more of these bets than you lose.
How do I start trading binary options?
The first step is to set up a binary options trading account with a reputable broker, and one that also allows simulated trading. The goal should not be to lose real money while you learn how to trade these. Once you are ready, you then make a deposit with them and start trading with real money.
Are binary options gambling?
This really depends on how we define gambling, as all trading and investing involves placing bets on certain outcomes and binary options are no different. Gambling in the pejorative sense usually means betting with no real chance of winning over time, like in a casino, and binary options do allow you to beat the house.
How do binary options brokers make money?
Binary options brokers aren’t really brokers, they act as principles in binary options trades, and take the other side of your trades. They make their money by paying out less when you win than they charge you when you lose, but they keep their profits reasonable enough to still give people a good opportunity to beat them.
Is binary option legal?
Trading binary options is generally legal in most jurisdictions, although it is wise to check out its legality in the one that you live in prior to looking to open an account. Brokers will tell you if you can’t do it with them from where you live though if you apply for an account so that’s how most people end up finding this out.
What is binary option trading all about?
Binary options involve purchasing an option of sorts, although option isn’t the right word here as these positions aren’t redeemed for any asset other than cash, while true options involve the option to buy or sell something else later. Binary options are essentially bets on something happening or not later.
Is Binary Options easier than forex?
The big appeal with binary options is that we are not required to manage our positions like you need to with any other form of trading. Once we buy a binary option, the decision making is over, and in this sense it’s easier to trade binary options than forex or any other form of trading we could do.
Is Binary Options Legal in USA?
Certain types of binary option trading are legal in the USA, but you can’t just do a search for binary option brokers and just pick one. There are only three platforms to trade binary options in the U.S., NADEX, CME, and the Cantor Exchange. NADEX is by far the most popular and is also very user friendly.
What is the difference between options and binary options?
Standard options involve purchasing an option to buy or sell something in the future at a given price. Losses are limited to the option price but profits are unlimited. Binary options can generally only be held to expiration, and the payout is strictly to limited to the amount in the contract.