Binary Options Trading Explained
New traders tend to feel apprehensive when branching out from traditional investment opportunities.
While investing in markets that are rarely understood is generally inadvisable,
diversifying is necessary to make substantial gains when traditional options become too volatile or stagnant.
Trading index binary options, for instance,
provides investors with a relatively safe alternative to stop-loss trading. The
question is whether traders can sufficiently diversify to avail of new markets.
What are Index Binary Options?
Index binary options were given their name because they only ever deal with two
possible results or outcomes. On the stock market, the 0-1 nature of index binary
options is such that traders can invest in two options. These are whether a share
price moves above or below a certain value within a specified period of time.
Traders, or investors as they are often known, purchase either option (or both).
Brokerage firms offer different rates and incentives, so the terms of one
transaction can be markedly different from another. How much money the trader makes
on their investment depends on the number of contracts they purchased and whether
their choice of option was successful.
A trader might, for example, buy one contract for $1,000 on the expectation that a
commodity will increase in value above a certain figure. Because the contract is
subject to a time limit, which might be one day, several weeks or a month, it can
only be successful or not successful. The value of the commodity can be higher than
the amount stipulated, in which case the trader will succeed, or it can be the same
or lower, in which case the trader loses their investment. On the stock exchange,
many brokers offer deals so that losing options return nominal compensation (e.g.,
$100 of the $1,000 invested). A winning option, meanwhile, pays out a set percentage
of the investment (e.g., $1,680 is paid out if a $1,000 contract is purchased with a
return of 68%).
Forex Index Binary Options
Trading in Forex index binary options is slightly different. Brokers offer win/loss
binary options in the truest sense because they do not pay out compensation on
losing options. The value of a winning Forex index binary option is fixed at $100,
but contracts can be purchased at different prices (typically up to $20). A winning
option bought at $20 would return five times the value, or $100 per contract. Forex
traders can make a sizeable profit, therefore, by purchasing multiple contracts at a
relatively low price. Five contracts purchased at $100 would return $500 if the
option closed in the trader`s favor.
The main benefit of Forex index binary options is that traders can hedge their
investments to make reasonably good returns on low-risk options. A trader might, for
example, purchase both types of contract for one particular binary option. In other
words, they could bet on both outcomes; if the price goes above a certain value,
they can make a profit; if the price goes below a certain value, they can still make
a profit. The trader only loses out if the price of a currency or pairing goes
neither above nor below the target figures.
The low risk-to-return ratio of Forex index binary options is tempting many people
away from traditional stop-loss trading. As many people who trade Forex will be able to appreciate,
hedging bets on binary options can prove far less risky than holding out for
breakout prices and avoiding excessively low stop-loss figures.