April 26, 2017 08:01:00 GMT

Binary Options

What to know about Binary Options

Binary Options is an easy and excitng way to earn extra income. Trading involves assets with a variety of timed expirations via options with capabilities that pay either a fixed amount or nothing at all, depending on whether a certain condition is fulfilled when the option expires.

Binary Options are also referred to as All-or-Nothing options, since the payoff is all or nothing. The return is therefore fixed and known as: FRO's, Fixed Return Options. Digital options are also another commonly used term. A trader simply needs to make a decision about the direction of a rate change regardin whether the underlying asset's price is going up or going down - without taking other factors into consideration.

Binary Options are considered to be one of the easist trading products to understand, the trader knows at the onset of the trade what will be the maximum profit and loss will be, making it easier to make quick decisions and invest in the heat of the moment.

Binary Options trading is considered one of the fastest growing segments of the simplified trading products.

Binary Options are fixed-odds-return investment products that have two possible absolute outcomes with a structured reward and risk, hence the word 'binary'.

Binaries are considered a mass market Financial instrument allowing people to trade with a very flexible approach and without the complexities of traditional Vanilla Options.
 

Vanilla options versus Binary Options

  Binary Options Vanila Options
Expiration: Variety of expiration terms: end of day, hourly and even shorter expirations like 15 min binaries. Once a month.
Payout: Fixed. Dynamic, based on the
underlying asset price.
In-The-Money: Price movement isn't relevant, just the direction (above or below executed vaue). Requires a relation of the strike price of an option and the underlying price in order to execute the option.
Execution: Can't be exercised before expiry. Options usually can be exercised any
time prior to expiry.
Right to buy: Does not have the right to exercise to stocks. The option owner has the right to exercise his options and turn them into stocks in case option expires 'In-the-money'.

Binary Options payoff is based on the price of the underlying asset when the contract expires, however with a Binary Option you only need to take a position on the anticipated direction of the underlying asset price. The main difference between a regular vanilla option and a digital option is the extent to how much time a contract lasts and causes losses or gains. Binary Options often referred to as FRO, Fixed Rate Options, since the contract will have a predetermined percentage of fixed rate of return, unlike traditional vanilla options which are riskier and more complex to achieve potential gains and makes the trader ponder a multitude of possible scenarios.

Whether you are looking for a short-term speculation or hedging your portfolio, Binary Options can help you achieve a high payout via quick trading durations.

Binary contracts are available on a variety of underlying assets including Stocks, Commodities, Currencies and Indices.

Whether the trader has made a call or put, at contract expiration if the trader has been successful in regards to the anticipated direction of the underlying asset price - then the contract will expire in the money and the trader profits. 

When the expiry level is equal to the strike price, the contract will expire at the money. Normally, there will be a fixed cash settlement to be returned which is often the initial investment; however this depends on what was predetermined and agreed within the contract.

Example: The price of Google. Roughly priced at $646 per share, a trader might be inclined to speculate on the price movement of a share within a time frame of only one hour. 

If you think that Google will rise above this price level, then you should buy a binary call option - and if the price of Google finshes above the starting price at the expiry, the option expires in the money, paying you the fixed odds promised before the trade.

If you think that Google will fall below this price level, then you should buy a binary put option - and if the price of Google falls below the starting price at the expiry, the option expires in the money, paying you the fixed odds return promised before the trade.

A trader could also open multiple options with Google during the fixed time of the contract. To learn more about this click here.

Advantages of Binary Options

  • Binary Options are simple to understand for the trader and straight forward.
  • The trader only needs to consider the direction of the asset price.
    There is limited risk and a predetermined payout - you know what you are getting in the end.
  • Knowing potential risk and success makes it easier to trade, traditional vanilla options can cause fear among buyers because of the unknown possibilities and the complex nature of the risks.
  • Binary Options are often used as an effective tool to hedge existing positions. As a product Binary Options are compatible to the most commonly used trading methods and strategies. Also Binary Options offer a greater selection of short-term contracts across all markets, which enable intra-day traders to trade more frequently.
  • As opposed to vanilla options, trading Binary Options can close 'in the money' allowing the trader to collect the full payoff even with a minimal price change of a single tick.
  • Binary Options are issued 24/7, allowing traders to trade in multiple time frames. Binary Options are offered in a variety of global underlying assets via intenational exchanges. Traders are now able to participate in Binary Options 24/7 using one trading platform..

Create your own Binary Options Strategy

A very common strategy is to place a put or call option trader when there has been a big move in the market, especially if there has been an unexpected move. Poor results from banks or other corporations, natural disasters, unemployment rate increases in certain countries, interest rate cuts, or even influenza epidemics can shake up the global markets, and often Binary Options allows traders to open positions related to these events that historically have had a big influence on market prices.

While it is important to watch the news and keep an eye on business reports, MaxOptions also assigns Account Managers to guide and help educate traders to consider strategies in order to try and maximize profits.

Digital Options in Global Financial Markets

Binary Options trading includes exotic options referred to as digital options. These options exist solely online without paperwork, and no central exchange. You cannot go to an actual location to purchase these options, and they are a product of digital technology.  Since these options are distinctly for online trading, finding the correct platform to trade with is a key. Learn more about our trading platform.
Digital options are usually traded OTC (Over the Counter) across all assets in financial markets, but more commonly used within the Forex and Interest markets. Recently numerous stock exchanges have produced listed digital options on selected stocks, commonly known as FRO, Fixed Return Options. Today the CBOE offers fixed return options on S&P500 and VIX, also 20 stocks were listed on the AMEX in 2008.