CAP – Binary Options göstəriciləri

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Binary Option

What is a Binary Option?

A binary option is a financial product where the buyer receives a payout or loses their investment, based on if the option expires in the money. Binary options depend on the outcome of a “yes or no” proposition, hence the name “binary.” Binary options have an expiry date and/or time. At the time of expiry, the price of the underlying asset must be on the correct side of the strike price (based on the trade taken) for the trader to make a profit.

A binary option automatically exercises, meaning the gain or loss on the trade is automatically credited or debited to the trader’s account when the option expires.

Binary Options Outside the US

Basics of a Binary Option

A binary option may be as simple as whether the share price of ABC will be above $25 on April 22, 2020, at 10:45 a.m. The trader makes a decision, either yes (it will be higher) or no (it will be lower).

Let’s say the trader thinks the price will be trading above $25, on that date and time, and is willing to bet $100 on it. If ABC shares trade above $25 at that date and time, the trader receives a payout per the terms agreed. For example, if the payout was 70%, the binary broker credits the trader’s account with $70.

If the price trades below $25 at that date and time, the trader was wrong and loses their $100 investment in the trade.

Key Takeaways

  • Binary options depend on the outcome of a “yes or no” proposition.
  • Traders receive a payout if the binary option expires in the money and incur a loss if it expires out of the money.
  • Binary options set a fixed payout and loss amount.
  • Binary options don’t allow traders to take a position in the underlying security.
  • Most binary options trading occurs outside the United States.

Difference Between Binary and Vanilla Options

A vanilla American option gives the holder the right to buy or sell an underlying asset at a specified price before the expiration date of the option. A European option is the same, except traders can only exercise that right on the expiration date. Vanilla options, or just “options,” provide the buyer with potential ownership of the underlying asset. When buying these options, traders have fixed risk, but profits vary depending on how far the price of the underlying asset moves.

Binary options differ in that they don’t provide the possibility of taking a position in the underlying asset. Binary options typically specify a fixed maximum payout, while maximum risk is limited to the amount invested in the option. Movement in the underlying asset doesn’t affect the payout received or loss incurred.

The profit or loss depends on whether the price of the underlying is on the correct side of the strike price. Some binary options can be closed before expiration, although this typically reduces the payout received (if the option is in the money).

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Binary Options and Regulation

Binary options occasionally trade on platforms regulated by the Securities and Exchange Commission (SEC) and other regulatory agencies, but most binary options trading occurs outside the United States and may not be regulated. Unregulated binary options brokers don’t have to meet a particular standard; therefore, investors should be wary of the potential for fraud. Conversely, vanilla options trade on regulated U.S. exchanges and are subject to greater oversight.

Real World Binary Options Example

Nadex is a regulated binary options exchange in the United States. Nadex binary options are based on a “yes or no” proposition and allow traders to exit before expiry. The binary option’s entry price indicates the potential profit or loss, with all options expiring worth $100 or $0.

Let’s assume stock Colgate-Palmolive Co. (CL) is currently trading at $64.75. A binary option has a strike price of $65 and expires tomorrow at 12 p.m. The trader can buy the option for $40. If the price of the stock finishes above $65, the option expires in the money and is worth $100. The trader makes $60 ($100 – $40).

If the option expires and the price of the Colgate is below $65 (out of the money), the trader loses the $40 they put into the option. The potential profit and loss, combined, always equals $100 with a Nadex binary option.

If the trader wanted to make a more significant investment, he or she could change the number of options traded. For example, selecting three contracts, in this case, would up the risk to $120, and increase the profit potential to $180.

Non-Nadex binary options are similar, except they typically aren’t regulated in the United States, often can’t be exited before expiry, usually have fixed percentage payout for wins (whereas Nadex payouts fluctuate based on the price paid for the option) and may not trade in $100 increments.

A Guide to Trading Binary Options in the U.S.

Binary options are financial options that come with one of two payoff options: a fixed amount or nothing at all. That’s why they’re called binary options—because there is no other settlement possible. The premise behind a binary option is a simple yes or no proposition: Will an underlying asset be above a certain price at a certain time?

Traders place trades based on whether they believe the answer is yes or no, making it one of the simplest financial assets to trade. This simplicity has resulted in broad appeal among traders and newcomers to the financial markets. As simple as it may seem, traders should fully understand how binary options work, what markets and time frames they can trade with binary options, advantages, and disadvantages of these products, and which companies are legally authorized to provide binary options to U.S. residents.

Binary options traded outside the U.S. are typically structured differently than binaries available on U.S. exchanges. When considering speculating or hedging, binary options are an alternative—but only if the trader fully understands the two potential outcomes of these exotic options.

Now that you know some of the basics, read on to find out more about binary options, how they operate, and how you can trade them in the United States.

U.S. Binary Options Explained

Binary options provide a way to trade markets with capped risk and capped profit potential, based on a yes or no proposition.

Let’s take the following question as an example: Will the price of gold be above $1,250 at 1:30 p.m. today?

If you believe it will be, you buy the binary option. If you think gold will be below $1,250 at 1:30 p.m., then you sell this binary option. The price of a binary option is always between $0 and $100, and just like other financial markets, there is a bid and ask price.

The above binary may be trading at $42.50 (bid) and $44.50 (offer) at 1 p.m. If you buy the binary option right then, you will pay $44.50. If you decide to sell right then, you’ll sell at $42.50.

Let’s assume you decide to buy at $44.50. If at 1:30 p.m. the price of gold is above $1,250, your option expires and it becomes worth $100. You make a profit of $100—$44.50 = $55.50 (minus fees). This is called being in the money. But if the price of gold is below $1,250 at 1:30 p.m., the option expires at $0. Therefore you lose the $44.50 invested. This called out of the money.

The bid and offer fluctuate until the option expires. You can close your position at any time before expiry to lock in a profit or a reduce a loss, compared to letting it expire out of the money.

A Zero-Sum Game

Eventually, every option settles at $100 or $0—$100 if the binary option proposition is true and $0 if it turns out to be false. Thus, each binary option has a total value potential of $100, and it is a zero-sum game—what you make, someone else loses, and what you lose, someone else makes.

Each trader must put up the capital for their side of the trade. In the examples above, you purchased an option at $44.50, and someone sold you that option. Your maximum risk is $44.50 if the option settles at $0, and so the trade costs you $44.50. The person who sold to you has a maximum risk of $55.50 if the option settles at $100—$100 – $44.50 = $55.50.

A trader may purchase multiple contracts if desired. Here’s another example:

  • NASDAQ US Tech 100 index > $3,784 (11 a.m.).

The current bid and offer are $74.00 and $80.00, respectively. If you think the index will be above $3,784 at 11 a.m., you buy the binary option at $80, or place a bid at a lower price and hope someone sells to you at that price. If you think the index will be below $3,784 at that time, you sell at $74.00, or place an offer above that price and hope someone buys it from you.

You decide to sell at $74.00, believing the index is going to fall below $3,784 (called the strike price) by 11 a.m. And if you really like the trade, you can sell (or buy) multiple contracts.

Figure 1 shows a trade to sell five contracts (size) at $74.00. The Nadex platform automatically calculates your maximum loss and gain when you create an order, called a ticket.

Nadex Trade Ticket with Max Profit and Max Loss (Figure 1)

An Overview of Binary Options Trading

An Overview of Binary Options Trading

Binary or ‘digital’ options have been around for several decades. Originally, only large financial institutions and the wealthy had access to this type of trading.

However, the US Securities and Exchange Commission (SEC) allowed binary options trading in 2008. The internet and technology gave the whole world access to binary options.

The demand for binary trades increased rapidly, aș they are simple to understand and easy to access.

What is Binary Options Trading?

Binary options are financial instruments that allow investors to speculate on whether the price of an asset will go up or down in the future. The trade time (known as time frame) can be as little as 60 seconds, making it possible to trade hundreds of times per day across any global market.

Binary options depend on the outcome of a “yes or no” proposition, hence the name” binary”.

In other words, a binary option is a type of option with a fixed payout in which you predict the outcome from two possible results. If your prediction is correct, you receive the agreed payout. If not, you lose your initial stake, and nothing more. It’s called ‘binary’ because there can be only two outcomes – win or lose.

In binary options, the gain or loss on the trade is automatically credited or debited to the trader’s account when the option expires. The payouts usually are ranging between 70% and 90%. These platforms charge high broker fees from 10% to 30%.

Binary options let traders profit from price fluctuations in multiple global markets, which are simple to understand, making them a popular choice for low-skilled traders.

The binary options trader places a Call order when bullish on a stock, index, commodity or currency pair, or a Put order on those instruments when bearish. For a Call order to make money, the market must trade above the strike price at the expiration time. For a Put to make money, the market must trade below the strike price at the expiration time.

Example

Let’s say Bitcoin’s price is $6.000, and you think that in 15 minutes from now, the price will be higher than the actual price – that means you place a “Call” trade.

At the end of the 15 minutes, if Bitcoin’s price is higher than the entry price, even with 1 cent, the trade is won.

The same thing happens when you place a “Put” trade – it means that the trader speculates that in 15 minutes from now on, the Bitcoin’s price will be lower than the entry price.

Types of Binary Options Trading

1. Call / Put trades are the simplest in binary options trading. They are the best entry-level option for traders who are new in the world of binary options trading.

2. Touch / No Touch trading allows predictions on whether or not an asset’s price chosen by the trader will be reached before the trade expires. This order type is particularly useful during times of market volatility, or for certain styles of technical analysis.

When trading binary options, risk and reward are known in advance, offering a significant advantage. There are only two outcomes: Win a fixed amount or lose a fixed amount. They’re simple to use, and there’s only one decision to make: Is the underlying asset going up or down?

Classic binary options platforms are prone to fraud and hence banned by regulators in many jurisdictions. Many binary option outlets have been exposed as fraudulent.

But despite the somewhat negative reputation, binary options are legal. The majority of companies operate fairly, but some out there that operate scams, with some unregulated brokers promising quick cash, whilst operating frauds.

Binary options themselves are legitimate and can be a profitable trading instrument when used correctly. However, steer clear of ‘instant money’ promises, brokers that cold call, and celebrity endorsements, plus any claims that you can ‘start trading binary options for free.’

To profitably trade binary options, their pros and cons need to be understood and making sure binary options are the right tool for generating profitable trades, risk tolerance, and capital requirements.

Advantages of Binary Options Trading

The most significant advantages în trading binary options are outlined below.

  • Simplicity – By deciding on only one factor, direction, the bet is straightforward. The price can only go up or down. No need to concern with when the trade ends, the expiry time takes care of that.
  • Fixed risk – The risk is kept to a minimum with very few trading parameters.
  • Trade control – Knowing what is gained or lost before entering the trade, there is greater control from the start.
  • Profit potential – The returns in binaries are extremely attractive. Some brokerages promise payouts of up to 90% on a single trade. Binary options can be defined as simple trades with large profit potential.
  • Choice – Binary options gift traders the opportunity to trade instruments across virtually all markets.
  • Accessibility – Real-time charts are available for every market 24 hours a day.

Risks of Binary Options Trading

While there are plenty of reasons to delve into trading on binary options, there remain several downsides:

  • Reduced trading odds with some brokers.
  • High broker fees from 10% to 30$.
  • Limited trading tools – Most brokers offer advanced charting and analysis capabilities, but trading tools for binary traders are often limited.
  • Price of losing – A win percentage of at least 55% to break-even is needed.
  • Risk management – Losing capital can happen with ease, and this type of trading could not be suitable for all traders.

Maximize profits by looking for brokers with a competitive and transparent fee structure. A broker offering low minimum deposits is ideal for testing this trading system. Make sure the broker’s platform is easy to use and provides all the charts, patterns, and tools needed to make smart and accurate trade decisions.

For beginners, a Demo account first is a sensible idea. Funded with simulated money, it’s the perfect place to make mistakes and learn before real capital is put on the line. Most binary options Demo accounts require no deposit and are a great way to practice at first.

Attribution

This article is contributed by the TRIBTC team. TRIBTC is a peer to peer crypto option trading platform.

Further Reading

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