If you’re new to trading you may be a little overwhelmed by the sheer number of markets and products you can trade, from basic stocks and ETFs to traditional options and Forex. And now there’s a new kid on the block, binary options.
So what is a binary option? Binary options are basically a way of simplifying trading; They get their name because there are only two possible outcomes to each trade, you either make a predetermined profit or you make a loss and have to cover the cost of the trade.
If you’re new to trading, binary options are a great way to learn due to their simplicity. You don’t need to deposit several thousand dollars to start and you can make significant profits just trading part time. They are not a get rich quick scheme however, this is not gambling. You need to learn how to trade properly to be successful.
How Do You Trade Binary Options?
You buy binary options from a binary options broker, they’re not available from mainstream brokers like E*TRADE as yet. Binary options are only available in a limited number of underlying assets but they cover most of the mainstream indices and currency pairs.
When you buy a binary option you first need to choose your underlying asset, let’s say you want to trade the S&P500. You think that the S&P500 is going to rise the following day so you purchase a call option. A call option means you think the price will rise and a put option means you think the price will fall.
You now need to decide how much you want to invest; most binary option brokers start at $1 and go up to $1000 per trade. Once you’ve decided how much to invest you now need to decide over what time frame. Most binary options are set to expire in 1 hour but you can purchase other time frames from 1 day to 1 week if you wish.
So you’ve decided you’re going to risk $50 on your S&P500 trade, you purchase 50 calls which will expire in 1 hour. These options come with a profit of 80% and refund rate of 5%, these values are decided when you purchase the option so you know exactly how much you’re going to win or lose.
That means that if you’re right and after 1 hour the value of the S&P500 is at or above the price at which you bought the option you win $90 ($50 + 80% = $90). If you’re wrong however and the value has fallen bellow your purchase price, you have to cover the cost of the trade less the refund rate which in this case is 5% so you lose $47.50.
Trading binary options is no harder than making an old fashioned bet, you choose an underlying asset, in this case we chose the S&P500. You decide where you think the market is headed and you purchase the corresponding options. If you’re right more times than you’re wrong you can make a significant income using binary options. And best of all you don’t have to spend all day monitoring the markets, a quick check every hour or so is all that’s required.