You may have heard talk of binary options in the past, but not been sure what exactly this form of investment entails. Most simply put, binary options centre around a yes or no proposition – will a particular asset rise beyond a set price at a set time? If you are a binary option trader, you would bet on whether it will or won’t. Pretty simple, right? It is this simplicity that has allowed binary option trading to garner such wide appeal, especially amongst those who are new to financial markets.
Simple as it may be – one should nonetheless make sure they are well-versed in the details of binary options trading before delving straight into this method of making come extra cash. As a trader, you will need to know which markets, and during which times, you may bet on an asset. You should be familiar with both the advantages and disadvantages of trading in any given asset. Furthermore, you will need to ensure that you are trading with a company that is licensed to offer binary options to American citizens, as the US has its own set of regulations relating to the practise of binary options trading.
If this is your first time trading, you’d be well-advised to read up on the industry at an authoritative financial publication such as www.ft.com and stay updated on the latest industry news at a trading source like www.binaly.com
So how does binary options trading work in the US?
Let’s say you’re presented with a proposition such as “Will the price of coffee be valued at over $1.5062 per pound at 2.30pm today?” If you think the price will indeed be valued at that figure or above, then you can buy that binary option. If you think the price of coffee will be below that figure, then choose instead to sell the binary option.
A binary option costs between $1 and $100. There is a bid and offer system. So, if the binary option is trading at $30.6 (bid price) and $32.0 (offer price), then you would spend $30.6 to sell it and $32.0 to buy it. Now, if you were to buy it and find that by 2.30pm, the price of coffee has risen above $1.5062 as predicted, then the option becomes worth $100. In this example, you’d make a profit of $68 ($100 – $32). Traders often refer to this as ‘being in the money’.
Alternatively, the price of coffee might end up below $1.5062 at which point the binary option will expire and not be worth anything. You would therefore lose the $32.0 you invested. Keep in mind, however, that the bid offer ($32.0) will fluctuate until the option expires.
You can trade in a varied number of assets such as gold, oil, stocks and currencies.
Basically, binary options trading is a zero-sum game. Each option will eventually settle at either $0 or $100 depending on whether the proposition is true. As such, the profit you make will be money lost by someone else. The money you lose, meanwhile, goes to someone who bet correctly. The maximum you can ever lose is the full amount of what you put in, so you never risk losing more than $100 with any binary option in the US. The amount you win, meanwhile, will always equal $100 minus the money you placed to bet.
But how is the bid and ask price decided?
It is the traders themselves who determine what each binary option is worth. The price typically reflects the likelihood of the proposition being true. So, if you see that a binary option is selling at $85, then this is because traders strongly believe that the price of the relevant asset will rise. The profit here won’t be much, but the low risk would still draw people to bet on winning that $15. If the price were to for example be at $30, meanwhile, it means there is less belief in that the asset value will rise. Selling the option in this case ensures you at get least get $30, while others who purchase the option at $30 are willing to risk that money for the small chance of a big pay-out ($70).
Where is it possible trade in binary options?
There are a number of binary options brokers online. Most charge fees to enter, but some offer sign-up bonuses with which to bet. The binary options website you choose to go with will depend on the type of asset you are interested in trading, and you will have to choose a broken that adheres to your country’s specific regulations on binary options. Be sure to always do your research before placing your bets at an online broker, and don’t hesitate to try out several binary options trading sites before settling on the one you’re most comfortable with.
For the finance orientated mind with an eye on the economy, binary options trading can make for a fun and lucrative side income over time. Place low risk bets to start with, study the outcomes of investments, and you’ll find in time that you will grow increasingly skilled at trading binary options.