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What are options in finance and how are they different from binary options?

A new binary options broker appears nearly every day. Is this type of trading anyhow similar to regular options trading? Find out the truth in this article!

by Forex Bonus Lab

Options are very popular among investors in the forex field. Options are contracts that give you the right to either buy or sell an asset at a certain price over a period of time. You don’t have to buy or sell it at that specific price though as you have the option to sell or buy it at this point if desired. This is a popular part of forex trading that you can use to your advantage.

Calls

A call lets you buy a pair at a certain price. This price is called the strike price.

You can use a call if you feel that the value of the pair will go over the strike price before the option expires. You could make money if the value does indeed go up as you will profit off of buying it at a value that is much less than what it is really worth.

Puts

A put is an option where you will have the right to sell the pair at a particular strike price. You would buy into this if you feel that the value of the pair is going to decline as the option expires.

Let’s say that you buy an option where you will put that the $5,000 strike price will go down by less than that total over the course of a few weeks. You can end up getting a profit based on how low the value of the currency pair goes as the option ends. Of course, you will lose the initial amount of money you invested if the put fails. You’ll at least know what you are risking though.

Premium

The premium on your option is the purchase price that you will get into. This is the highest amount of money that you can risk or lose. This means that you will understand ahead of time what your maximum losses can be. This in turn lets you prepare your investment strategy the right way.

Binary Options

A binary option works like a standard option but the premium will be of your choosing. The timeframe is usually shorter as well.

There are two possible outcomes that can come about here. First, the payoff can give you a fixed amount of money based on the contract you prepare. Second, the payoff will be nothing at all if it doesn’t work.

In other words, the binary option is essentially designed with a set series of results. It will go one way or another; you’ll have an easier time with planning your investment when this is all considered.

Binary options can come in three forms:

  1. An up/down option can last for as little as a few minutes in some cases. You will buy a call if you feel the closing price is over the strike price when it expires or a put if the closing price is lower.

  2. Touch options state that the option will be either a one touch option where the strike price is touched at least once. A no touch option entails the price not touching the strike price; that is, the momentum will stay the same all the way through.

  3. A range option is where the price must either stay within a set range or go out of that range depending on the choice that is made.

Is It Regulated?

You have to be careful when getting into one of these options. Currently most of the binary options brokers are located in the offshore areas, and they are unlikely to have any regulation whatsoever. Be careful and trade only with regulated brokers, if you decide to trade binaries at all.


*This post was published according to the "Contributed Article Terms and Conditions"

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