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Binary Options: A Variant on Trading and Investing

Posted by gambler101 on Mar 5, 2015 in online gambling

binary-options-brokerMost investments made on the financial exchanges and securities markets around the world involve trading instruments with a certain degree of complexity. Take equity securities, for example, which are normally traded in exchanges such as the NASDAQ and the New York Stock Exchange on Wall Street; these instruments are subject to several trading factors such as their price-to-earnings ratio, trading volume, dividends, stock splits, financial reporting, and more. These financial instruments can be made even more complex by attaching option contracts to them.

Binary options are new financial products that can be traded or exchanged with a lesser degrees of complexity. They are financial contracts, but market participants are not expected to acquire or sell instruments or securities. They are classified as exotic options by regulatory entities such as the Commodity Futures Trading Commission (CFTC) in the United States. These are not complex instruments as their features are generally easier to understand when compared to futures contracts and other derivatives.

How Binary Options Work

The basic trading strategies that apply to stock options can be found in binary options, albeit in a more elementary fashion. Brokers offer binary options as contracts that allow traders to profit from opposite outcomes. For example, a broker may provide binary options on the Dow Jones Industrial Average (DJIA) with various time frames and strike prices. If the DJIA is currently at 15,980 points and a trader believes that the closely-watched index will reach 16,000 points or more in the next two hours, he or she can purchase a call binary option and profit from this market observation.

The potential rewards or payouts of binary options are also set by the broker, and they are typically expressed in percentages. For example, a DJIA call priced at $100 with a fixed return of 50 percent will net the trader $50 if the strike price is reached before expiration.

Market conditions and the brokers’ profit margins will dictate the pricing of binary options. In their most basic form, binary options that expire without reaching a strike price do not have any value left in them, although brokers can also set pricing rules for expired contracts with a residual value like 15%.

Understanding the Risks in Binary Options

As with other options contracts, traders must understand that the inherent risk of binary options rests on the fact that the payout amounts are often less than their investment. Another risk factor to consider is that expired binary options are normally completely depleted of value. A stock trader taking a $100 position on the market that turns into $50 at the end of the day will still have a chance to recover loses if the market turns bullish in his or her favor. Binary options traders do not have this option.

Also be wary of binary options scams from online brokers who make unrealistic promises. Binary options can be a lot of fun trading but they are not an easy way to print money as some unscrupulous operators would like you to believe.

Binary options are not for everyone. Investors who like to build portfolios filled with a diversity of securities will probably dislike not being able to hold on to an underlying asset. Still, binary options are popular among traders who do not like to hold on to market positions for too long and who do not like to be tied down to the whims of the market. Traders who are familiar with technical analysis and who can identify trends and patterns will like them as well.