BINARY OPTIONS TRADING GUIDE
A binary option can have only two likely results, giving fixed returns. Either of the two results is specified at the time of making a contract. The contract presents the buyer (called the owner) with the right but not the commitment of purchasing an original asset at a preset price inside a defined period of time.
The items getting traded are called underlying assets. Wide ranging items can be assets, including commodities (like precious metals, oil), currencies (such as JPY/US$), stocks (examples Coca Cola, Microsoft) or indices (FTSE100/Nasdaq.) The fixed price that the owner pays for purchasing an asset or the price he gets on selling it is called the strike price.
Trading of binary options gives the buyer a choice of estimating if the price of an underlying asset will shoot up or come down within a defined period of time, known as expiry time. Expiry time can be just one hour, a complete trading day or even a week or more.
When the owner estimates that the option would become higher than its present price at the time of expiring, he/she puts a call option. Alternately, the owner may opt for a put option on estimating that the option would come down from its present price at the time of expiry.
So, you can see that binary option trading offers a lot of flexibility, since the owner is free to select an asset of choice, its expiry time along with its price movement. The only element that remains unidentified is whether the price of the asset would go up or come down from its present price at the expiry time.
The returns of binary option trades are predefined at the beginning of any contract. When the contract ends "in the money" the buyer gets a profit of 65-75% on their investment but if it expires "out of money" the buyer gets back just 12 -15 percent of the amount invested. Many investors prefer binary option trading simply for the reason that the maximum amount that they may win or lose is already determined. They find it safer, compared to normal trading as the loss, if any is already fixed.
Here is an illustration of how binary options work. An investor X invests $200 on call option for Oil. The rate of return is set at 70 % and the chosen expiry time is end of the trading day. The present price of Oil is 66.9001. Now, at the end of the trading day, the closing price of oil becomes 66.9002. In this case the investor gets $340. Any increase above the original price of 66.9001 earns the same amount of profit for the trader. On the other hand, if the price dropped to 66.9000 or lower, then X gets back $30 only. That is how simple binary trading option is, making it the preferred investment of a number of investors. Of course, there's a lot more to this. You can read more about binary options trading and strategies at Optionsbee.