Trading binary options can seem deceptively simple, but leaning too far into that notion can blind people to some of the risks that often accompany this type of trading.
If you’re interested in taking the binary options path, it’s critically important to understand exactly what you’re getting into and setting appropriate expectations.
Will trading binary options enable you to buy a villa in the South of France next year? Probably not. Will they allow you to quit your full-time job and finally start on that novel you’ve always wanted to write? Don’t count on it.
The good news is this type of trading can serve as a great supplement to your other trading strategies and personal financial initiatives.
Here, we’ll take a look at what binary options trading is all about and you can decide whether it’s right for you.
Download a PDF version of this post as PDF.
What Are Binary Options?
Before we dive into specific binary options trading strategies, let’s review exactly what binary options are. According to Investopedia’s definition:
A binary option, or asset-or-nothing option, is a type of option in which the payoff is structured to be either a fixed amount of compensation if the option expires in the money, or nothing at all if the option expires out of the money. The success of a binary option is thus based on a yes or no proposition, hence “binary”. A binary option automatically exercises, meaning the option holder does not have the choice to buy or sell the underlying asset.
At the core, these types of investments are based on a yes or no proposition. You must decide whether you believe an underlying asset will be above or below a specific price at a specific time.
Binary trades are ruled by expiry times. These time constraints indicate how long you have to make your predictions regarding whether you believe an underlying asset will be above or below a specific price at a specific time. Once the expiration limit occurs, your predictions determine whether you gained or lost the money of your initial bet.
Expiration times vary from binary option to binary option. Some of these minimums are known as short expires, which means the expiration date is actually within mere minutes of the buy-in. There are medium and long expiries, as well. For medium expiries, the deadline could be anywhere from five to two hours. Long expiries typically last between two and 24 hours. Many experts believe that longer expiration times can help make predictions easier.
What Are the Underlying Assets of Binary Options?
In order to participate in binary options trading, you must first have ownership of an asset that can be optioned for a fixed amount. The types of assets common in binary options include stocks, indices, commodities, and currencies. Many binary traders chooses to trade with stocks, as this option can allow them to get high returns within a short span of time.
Along with indices and commodities, currencies are another popular binary option vehicle. Since currencies are liquid and often subject to dynamic price fluctuation, many traders choose to analyze their binary options across the complex — and often shifting — global currency market.
And now, a new asset has emerged: cryptocurrency.
Led by Bitcoin, this new, digital currency class is intriguing investors around the world who see the digitization of finances as the way of the future.
According to Options Advice, there are two prominent ways you can capitalize on Bitcoin binary options. The first strategy is by trading on what you think the imminent fluctuation of Bitcoin might be, and the second is trading regular options with Bitcoins as your currency.
If you’re interested in taking the cryptocurrency binary options route, I strongly suggest familiarizing yourself as much as possible with the trends dictating the ebbs and flows of the altcoin market.
An entire niche financial industry has been built up around educating consumers and future investors of digital coins and tokens. From resources like Cryptoslate to ICO listing sites like Coinschedule, there are many resources available to help you make the most strategic crypto trading moves possible.
What is a Call and What is a Put?
Two of the most common terms you’ll hear throughout the binary options world are call and put. These two labels represent the market positions of binary options.
You typically choose to call if it looks like the value will rise within the confines of the expiry time.
Options also have a strike price, which is the price at which the security would be bought or sold.
If you choose to call, you’re signifying your confidence that a stock will rise within the time limitations. If that stock valuation moves upward at all, you’ll receive both your initial investment as well as the return.
On the opposite end of the spectrum, a put signifies your confidence that the valuation of a stock will drop within a certain time limitation. So if you predict that a stock valuation will decline before the expiration date, and the stock does dwindle, you will have succeeded at that trade and will receive your initial investment — as well as the trade — back.
What Are Other Types of Binary Options?
Beyond call and put options, there are other distinguishing factors that separate binary options from one another.
This guide from Binary Tribune delves more specifically into binary options types based on the number of interactions a trader must initiate with the trade. The levels include one-touch, no-touch, double one-touch, double no-touch, and paired options.
Let’s take a look one-touch and no-touch options …
Essentially, a one-touch binary option indicates that in order for you to receive a payout, a trigger (or predefined barrier) must be reached. Traders often choose one-touch if they feel confident that a stock will move in a certain direction at a minimum amount.
The option only has to meet the predefined trigger level once (hence the “one-touch” term). However, as indicated by Binary Tribune, this strategy is often accompanied by some risk.
Beyond simply calling or putting, you also must feel confident that a certain valuation threshold will be crossed. However, with greater risk often comes greater reward.
In contrast, a no-touch binary option essentially depends on a trigger level not being reached.
Rather than hedging your bets that the valuation of a stock will rise above or dip below a specified amount, you’re betting that the trade will not dip above or below an amount.
Because you’re making the trade with the intention that a threshold will not be crossed in either direction, it’s referred to as “no-touch.” Like their one-touch counterparts, these trades come with greater reward — and risk — potential.
What Are the Pros and Cons of Binary Options?
Now that you understand binary options basics and the different factors between them, you might be wondering whether this type of trading aligns with your investment goals. Let’s weigh the pros and cons.
We’ll start with the benefits …
Photo by rawpixel.com from Pexels
Low Barrier to Entry
You don’t need a masters in economics to successfully engage in this kind of trading. For this reason, many first-timers enter the trading arena through buying and selling binary options. Comparatively, binary trading is relatively simple. When compared directly to other types of trading, including quantitative or arbitrage, trading binary options is straightforward and accessible to even the most novice of investors.
Many traders are eager to see fast results and liquidate within a specific time frame. Those who play the long game are typically most concerned with growing their money steadily over long periods of time, and many opt to invest in index funds, IRAs or bonds. But for the investors who are after speed, binaries may be a strong choice.
Binary options trading has become synonymous with high rewards. In many cases, you can receive up to a 70% return on their investments if your binary trades reach your expiration dates in the money. This high average return is what makes this type of trading vehicle attractive to many novice and expert investors.
As explained by Investopedia, the risk on binary options is capped off, so while the rewards could yield high returns, you can’t lose more than the cost of a trade.
If you’re just getting started with trading, there’s a good chance you don’t have excess capital lying around to snatch up shares of the fastest-rising stocks on the market. Binary trades offer a great alternative to other types of investments that require high-capital buy-ins.
In theory, you can experiment with a binary trade for any amount you’d like, whether it’s $5 or $50. Starting small and working your way up to bigger trade amounts incrementally is a great way to learn the lay of the land.
As you familiarize yourself with expirations, strike prices and — if you’re interested in one- and no-touch options — triggers, it’s best to gamble with an expendable amount that won’t derail your entire financial status.
Binary trading platforms make it easy to trade on any day and at any time. When it comes to binary trades, investors aren’t necessarily beholden to standard market times and broker availability.
Now, here are some of the disadvantages of binary trading …
Conduct any Google search on binary trades and one of the first things you’ll likely notice are the abundance of hits warning against binary scams and shady binary brokers. While these horror stories shouldn’t necessarily scare you out of ever trying binary trading on your own, they should encourage you to be vigilant.
If you come across a binary broker that sounds too good to be true, it’s because he or she most likely is. And if you come across a binary broker who doesn’t let you liquidate your investment, run in the other direction.
Binary trades have expiration dates that are often fairly short windows of time. Given this, it’s impossible to use binary options as mechanisms for long-term investments. If you’re interested in growing your finances over time, binary options probably aren’t the right solution.
Can You Really Make Money with Binary Options?
Short answer: Yes, but you MUST know what you’re doing.
If you’re serious about binary trading, start small. By making small investments and working your way up, you give yourself breathing room to assess market trends and begin to hone your instincts about when to call and when to put.
As is the case with many types of investments, history is sometimes the best predictor of the future. Many successful binary options traders have experienced trading wins and financial growth because they’ve spent time studying and familiarizing themselves with market movements.
Learning common candlestick patterns can make it easy to spot recurring trading patterns. For example, pinbars are one type of candlestick pattern. If your trading software shows a pattern that resembles a flat body with a protruding nose (either high or low) then the price is likely headed in the direction opposite of the nose.
Of course, trading patterns are never 100 percent accurate, so don’t fool yourself into thinking of them as absolute stock predictions. However, the more you can learn about patterns and begin to recognize them yourself, the more likely you’ll be comfortable making your own options decisions.
Is it Safe and/or Legal to Trade Binary Options?
While it’s legal to trade binary options within the United States, they’re only available to trade on Commodity Futures Trading Commission (CFTC) regulated exchanges within the country.
If binary options providers are based outside of the United States it’s probably not legal, so steer clear.
The Bottom Line
The good: Many traders like binary options for their transparency. Since these investments are traded at fixed costs, you know exactly where they stand.
The bad: Binary investments are also one of the more treacherous and “involved” investment roads.
The bottom line: Educate yourself like crazy. Avoid sketchy brokers. Start small and work your way up. Remain vigilant. Stick with these rules, and someday you might reach your binary options trading goals.
Want to Try Binary Options Trading?
At this point, you might be thinking about giving binary options trading basics a shot. It can deepen and diversify your trading repertoire.
This type of trading can quickly become complicated with the many different options available. So, like any other sector of trading, it’s important to seek out an education before you attempt to invest in this way. I can help you take your trading to the next level.
Is the for You?
While I’m most famous for being a penny stock teacher, that’s not the only subject I cover in my . Ultimately, as a teacher, I want to help my students forge long-term, sustainable careers as traders — whether with binary options, penny stocks or otherwise.
Will you be my next success story?
As you’ve now learned, if you study hard, start small, keep your scam radar on high alert, and stay educated, then you could succeed at trading binary options — a relatively simple type of trading that’s accessible to all investors, from novice up.
To power your binary options trading knowledge and see how it can help increase your trading prowess, join my to continue your education. I’m excited to work with you and help you reach your financial goals.