What are Binary Options?
With binary options trading you will always know exactly what you stand to lose and exactly how much you could win for every trade you make. However, that doesn’t make any one trade safer or a better bet.
A binary option is purchased on a provider’s platform, a contract is created that gives the buyer the right to buy an underlying asset at a fixed price, within a specified time frame from the seller – the binary option broker. The option must be held until maturity (even if that is five minutes away); unlike regular options it cannot be sold before then.
1. Controlled risk (you can’t lose more than a specified amount)
2. Low cost, big gains if you guess right
3. Ease of use—you can trade from home whenever markets are open and set up an account with a credit card.
1. Binary options are essentially gambling with an investment ‘theme’, in that the odds are set up to give the broker an edge so that over the long term the mathematics are in their favour. A typical example would be that a binary option broker pays $71 for each successful $100 “trade.” The player predicts that the price of gold will rise over the next hour. If the player is wrong and loses, they get back $15. Let’s say the player makes 1,000 “trades” and win 545 of them. Your profit is $38,695. But the 455 losses will cost $38,675. In other words, the player must win 54.5% of the time just to break even.
Binary options trading is simple and can be a fun introduction to predicting market movements but should be considered as a game rather than an ‘investment’.