Binary option - is an option, with two possible outcomes of trading: profit or complete loss. At the time of buying an option, the trader makes a prediction (in other words, a bet) on how the price of the asset will change: fall or rise. If the prediction is correct, then the option will bring profit, and if not, then, accordingly, the loss. Trading asset for the option can be different trading instruments: securities, commodities, stocks, currencies, etc.
The contract time of a binary option can range from one minute to several months. The rate of return ranges from 70% to 95%. This trading method was invented quite recently, about 20 years ago.
Example of a typical binary options trade
A brokerage company offers a 75% payout on a USD/JPY binary call option that is currently trading at 103 yen per US dollar.
After tracking the fluctuations in the USD/JPY price over the past hour, the trader believes that the price will rise over the next 5 minutes and decides to invest $1000 to purchase a USD/JPY binary call option that expires in 5 minutes.
If the USD/JPY exchange rate rises, for example, to 104 yen within five minutes, the investment will pay off and the trader will make a profit of 75% of his initial investment, which is $750.
However, if the price of the pair USD/JPY falls, down to 102 yen, then the trader will lose his initial investment of $1000.
Note that it does not matter if the USD/JPY rises to 110 yen or falls below 100 yen, both profits and losses will be fixed at $750 and $1000 respectively.
Currently, many brokers who offer platforms for trading binary options list the following advantages:
- Ease of use (to make a profit a trader only needs to make a prediction of how the asset will close at a certain time interval);
- Absolute transparency of the transaction, which the trader can check using any available method;
- Binary options can be applied to most of the assets which trade on the exchange. So a trader can choose to trade binary options on the stock he knows well;
- Binary options allow you to trade at any time of the day, five days a week. But the main point of binary options is luck. A person buys a binary option, succumbing to the desire for "easy money", and bets on a rise or fall in the price. If the price behaves as predicted, then the person makes a profit. If not, he loses everything he has put on.
Types of binary options
Classic binary options. They are the most popular among traders. This strategy involves opening a trade with expectation that price of an underlying asset will fall or rise through a certain strike. Then the trader waits for the expiration. Generally, transactions are opened for a period of 10 minutes to several hours.
Turbo options. The main difference from the classic binary options is the expiration time. Here it is 30 or 60 seconds. Using this tool, a trader can open up to 60 deals per hour, but it is rather problematic to make accurate predictions about the price behavior on such a timeframe.
One-touch, no-touch. This strategy has two lines: up and down. Making a purchase of this or that asset, the trader will receive profit only if the price chart will reach this line one time (for one-touch), or if the price does not reach a certain level (no-touch).
In addition, there are options "Stairs", "Range" and others.
But they are rarely used and a beginner who is getting acquainted with options will have a hard time understanding them.