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Binary Options Trading

 
     
 

 

In response to numerous email questions, I have finally put up a page on Binary Options Trading. Is it gambling? Is it investing? Read what I have put here, and you decide!

When you have digested this, see my review of the optionFair™ binary options trading platform.

 
     
 
 
     
 
     
 
 
     
 
 
     
 

Binary Options - trading or gambling?Binary Options Trading has become very popular in the last few years, especially since the CBOE made it available in 2008. Alternatively called digital options, all-or-nothing options or Fixed Return Options (FROs), they are valued for their simplicity, liquidity and diversity. Not only does trading include major US stocks, but currencies, indices and commodities can also be traded. There are now more than 125 trading platforms available, some more reputable than others. In one sense, this is the ultimate swing trading tool; one the other hand, many people have signed up with no knowledge of the stock market, and they simply gamble.

What are Binary Options?

Binary Options are classed as exotic options, and are extremely simple to use and understand. There are only two trading possibilities: a call, where you believe that the underlying stock will be above the strike price, or a put, where you believe it will be below. There are also only two possible outcomes: you make a profit on the trade when the option expires, or you lose your investment. That is why this instrument has been given its name: at any level, you have only two possibilities.

The Advantages of Binary Options Trading

  • there is a known risk and reward. Before you place a trade, you know exactly what profit you will gain, or what you could lose;
  • there are no commissions or fees. Typically, the platform will have calculated its margin before offering you a trade;
  • you can start with very low capital, as little as $100. Some platforms offer minimum trade levels of $10, but most of the bigger ones start with about $25 as a minimum trade.
  • there is only one decision to make: is the underlying asset going up or down? This makes trading extremely simple. You do not need to worry about exit targets or stop losses.
  • the trader has access to numerous asset classes (stocks, indices, commodities and currencies);
  • trades are very short term - you can often be in and out in 30 minutes.

The Disadvantages of Binary Options Trading

This is the bit that you should read, and contains the cautions that you should know about!

  • binary options are not an investment. They are a trading or speculating instrument.
  • it is very addictive, and for someone who has now knowledge of the stock market, it is no different from gambling. In order to beat the system, you need to be right with more than 55% of your trades, and this takes some knowledge of technical analysis and news analysis.
  • the industry is largely unregulated. However, a code of conduct has developed, and there are ways to ensure that the platform you are using is reputable and honest. Make sure that you do your research on the Binary options Trading Platform that you use.

Having said all that, if you know what you are doing, you can use this instrument profitably. Simply do not be naive, and do not gamble!

Binary Options Trade Example

If you have been watching the market, or a particular asset, you may believe that in the short term it will be going up or going down. For example, you have been following the whisper numbers on a stock like AAPL, and you believe that tomorrow's earnings report is going to exceed analysts' expectations. You feel sure that AAPL stock will jump up, but you do not know by how much. You simply purchase a call option that is timed to expire a few hours after the earnings report is delivered. The trading platform will tell you in advance how much profit you will make if you are right (for example, if the posted return is 71%, and you buy the call for $100, you will get a payout of $171). You will also be told up front what payout you receive if you are wrong. You may get nothing back, or you may get $15 returned. If the option expires exactly on the strike price, you will simply have your purchase price returned to you.

In conclusion...

If you decide to use this strategy, do so with caution. Do not gamble, but think through your strategy carefully, choose a reputable platform , and trade carefully.

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