Binary Options Trading
Binary Options Trading:
Binary options are a specific type of option that pays a specified amount if the option is exercised “in the money”. However, if the option expires “out of the money” the investor gets nothing. These are often referred to as all or nothing options or fixed return options. Here’s how they work:
• An investor determines that he or she believes a market will move either higher in value or lower
• He purchases a call binary option if he believes the value will move higher or a put binary option if he believes the price will move lower.
• If he is right and the market moves either higher than the call option strike price or lower than the put option strike price, he receives the payment that was predetermined in the option contract. He will receive the same payout regardless of how high (or low) the stock goes.
• If he is wrong and the stock never reaches the strike price, regardless of the position he chose, he gets nothing and loses everything he invested in the trade.
An example of a successful binary trade would look something like this:
Investor A has been watching the S&P 500 all day and has seen an upward trend in value. To take advantage of this, he purchases a call binary option, speculating that the upward trend will continue. The current market value is 1105 and he locates a binary option with this as the strike price that expires in three hours that offers a 60% payout at expiry if the value is greater than 1105. However, if the value of the market is lower at expiry, he will lose his entire investment.
Investors are able to invest any amount of money they like in binary options, though there may be some stipulations set by the brokerage firms themselves. For illustration purposes, Investor A has invested $100 in this call.
At the end of three hours, the market has moved to 1107. Investor A has been successful in this trade, since the market was indeed valued higher after three hours and has realized a profit of $60 ($100*60%=$60). Had the market closed below 1105, however, the investor would not only have not profited, but would have lost his initial investment as well.
