The Basics of Binary Options Trading
There are many ways to invest and generate an income. For newcomers it can be a daunting prospect, which is why we recently provided some tips in our article ‘How to Start Investing: A Beginner’s Guide’. That article looked at investing in stocks,
bonds, and mutual funds. In this article we turn our attention to binary options.
Binary options trading works a lot like Forex, as traders make money from small price fluctuations. In binary options, traders predict an asset’s price movement at a timeframe of their choosing.
Picking an asset
Traders can choose from many different assets for binary options trading. It can be currencies like the USD/EUR pairing, an index, or even a commodity like corn. The more volatile the asset is, the more traders can place predictions, and capitalize on the spreads.
It is important to pick an asset that you’re familiar with and not spread your investments thinly with binary options. The reason for this is because unlike investing in stocks, that can depreciate or appreciate over time, binary options trading focuses on the correctness of a trade at an exact time. Once the time frame expires, so does the binary options contract. Traders are advised to only focus on assets that they are very much familiar with. For example, if you’re familiar with the
oil trade or have been following the rise and fall of the Euro, you should stick to either of those two with your binary options trade. Trading on an industry or commodity you are familiar with will increase your chances of generating money.
Making money from Binary options
After picking an asset, a trader can now place his or her predictions on its price movements. Nadex states that the trading process for binary options involves limited-risk contracts based on a simple yes or no question. For example, do you think that the price of copper will rise at 6 PM by next Monday? If yes, then you must buy a binary that says you believe that the price of the asset will rise at exactly 6 PM by next Monday. However, if you think that the price of copper will remain stagnant or even fall at the exact same time and date, you must sell the binary. It’s that simple. If your prediction is correct, you will get $100 minus the premium being charged by your broker. If you’re wrong, you get nothing. You only lose what you used for purchasing the binary. Binary options have no liquidity concerns because the trader doesn’t own any of the underlying assets. Traders merely speculate on prices, while allows brokers to offer countless strike prices and expiration dates, which can be quite attractive for those who like a lot of options to trade on.
The bottom line
Binary options are a good way to speculate or hedge assets, which, like any other investment vehicle or forms of trade, come with advantages and disadvantages. The upside of trading binary options is that traders know the exact risks and rewards of the trade, as well as giving people exposure to different asset classes in the global market. The negatives, however, include non ownership of any asset as well as fixed payouts that include markups. Traders must always be wary of how payouts are calculated, as well as what happens if the binary options contracts expire directly on the strike price. Not all brokers of binary options are the same, and traders are advised to check with the Commodity Futures Trading Commission (CFTC) before
engaging in any deals with a broker.