Binary options are known by a couple of names ie – all or nothing or digital option. These are used to trade on a fixed return determined when the trade is placed. There are two terms you need to know – in the money and out of the money. A predetermined payout will be received by the trader if he is in the money and his initial investment will be lost if he is out of the money.
It does not make a difference to what degree the trader is in the money or out of the money as it would in a traditional trade. Currencies, stocks, commodities, and market indices—can be traded using binary. Binaries unlike traditional trading do not have set prices- instead the trader would put in whatever initial investment amount he desires and wants to risk and makes an investment when he buys his option. Their will always be a time limit to the closing of the binary option and they are mostly set at different times throughout the day. This ensures that a trader always has the option of purchasing a 1 month, 1 day, 1 hour or even a couple of minute options. Due to the shorter durations it ensures binary options are better suited for short term or day traders than its traditional counterparts
Here is a very good example of a binary option trade:
A trader wakes up to find that the price of oil is trading at $79 per barrel and will rise to $80 by early afternoon. He would then log into his binary account and take a close look at the payout percentage for a call option on oil with an expiration time of early afternoon and a strike of $80. He discovers the payout will be 180% of his initial investment if the option closes in the money and he will stand to loose 95% of his initial investment if the option closes out of the money. He is sure of what he has read and heard and decides to invest $800 in the call option. The option eventually closes mid afternoon and oil is now trading at $80.25. He has therefore finished in the money! Confident in her analysis of oil, the trader decides to invest 500 USD in the call option. When expiration occurs at 2pm, oil is trading at 80.25 USD, so the option expires in-the-money. He therefore stands to receive 180% or $1440 on his original $800 investment. Make use of our website to find a list of the best binary traders!
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Between 74-89 % of retail investor accounts lose money when trading CFDs