Binary options are financial options in which the outcome is either a specific monetary value or zero.
Binary options have increased in popularity in recent years and regulatory commissions have followed suit, the Securities and Exchange Commission (SEC) approved listing cash-or-nothing binary options as recently as 2008. Additionally, the Cyprus Securities and Exchange Commission (CySEC) began recognizing binary options as financial instruments as recently as 2013.
If you are interested in adding binary options to your portfolio, information on some of the leading binary brokerage firms in the world is available online.
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To get you started, we’ve put together a list of the top things you need to know. Now let’s count down the 5 Things You Must Know About Binary Options…
5. Comparison to Typical Investments
In most investments, an investor purchases an asset (such as a stock) at market value. The investor’s profit or loss is the difference between the value of the asset when the purchase was made, and when the asset was sold. However, the investor can earn additional profit through financial incentives provided for owning the asset (such as a dividend).
Binary options are a prediction on an asset’s movement for a known time frame. Binary options always have one of two outcomes (hence the use of the word binary), either a fixed monetary return or zero return.
4. Binary Option Example
An investor who believes that the price of stock A will close at or above 2.5000 at 4:00pm can purchase a call option on that result. If the stock is at or above 2.5000 at 4:00pm, the investor receives a fixed monetary amount, however if the stock is below 2.5000 the investor receives nothing.
Alternatively, an investor who believes that the price of stock B will close at or below 3.5000 at 4:00pm can purchase a put option. If the stock is at or below 3.5000 at 4:00pm, the investor receives a fixed monetary amount, however if the stock is above 3.5000 the investor receives nothing.
Binary options are more simple than most investments, since the investor is basically guessing whether a specific outcome will or will not take place within a pre-determined time frame. Alternatively, if an investor purchases an asset (such as a stock), the investor must make predictions on the future performance of the asset to justify a purchase or sale. The investor must also think about how long they are willing to have their money tied up in an investment.
2. Which assets can be traded as Binary Options?
Almost any asset can be traded with binary options, see some of the most popular examples listed below:
Currencies: Trading currencies with binary options is similar to foreign exchange trading (FOREX). Investors predict whether one currency is expected to be stronger than another after a fixed time frame.
Stocks: Trading binary stock options is a prediction on a stock’s movement after a fixed time frame.
Commodities: Trading binary commodities (such as gold, silver and oil) is a relatively low risk method of adding binary options to your portfolio, due to their low volatility.
Indices: In binary options trading, investors can bet on the performance of a number of indices such as the Dow Jones, New York Stock Exchange, S&P or the NASDAQ.
1. Risks and Criticism
Although investing in binary options has some advantages, the risk of fraud is likely higher than most investments. Binary options are not well regulated in most countries, and many companies trading binary options register in countries with very little regulation (such as Belize).
Although trading binary options is a lesser known strategy than purchasing equities, they can be an interesting and potentially lucrative addition to your portfolio. If you’re interested in adding binary options to your portfolio, please visit the link above to see our reviews of some of the leading binary brokerage firms in the world.