Binary options are one of the simplest financial assets for trading. The traders simply need to trade by placing a yes or no on whether a certain underlying asset will be trading above a certain price at a given time. The simplicity of binary options makes them a popular financial asset for trading among the new comers and traders.
I have explained a simple illustration below for you to understand binary option well: Suppose, will the price of oil be above $60 per barrel at 2PM today? If you think yes, you buy the binary option and if you think no, you can sell the binary option. There is a bid and ask price in the range of $0 to $100. If bid price (sell) is $44 and the ask price (buy) is $46 and you decide to buy the binary option and your trade is correct then you make a profit of 100-46 = $44. Each binary option is eventually a zero sum game. Whatever you gain is someone’s loss and whatever you lose is someone’s gain. The traders based on the probability of yes or no determine the bid and ask rate. The higher the rates mean higher the probability of yes and vice versa.
Nadex exchange is the first exchange in the US with focus on binary options. They are also available through Chicago Board Options Exchange. The Nadex contract charges a fee of $0.9 each for entry and exit with a capping $9 for 15 lots.
You can trade in multiple assets class for binary options which include:
- Major stock indices, like DOW 30, S&P 500, NASDAQ 100, FTSE100, etc.
- Forex pairs, like EUR/USD, USD/CAD, GBP/USD, etc.
- Commodities, like crude oil, gold, silver, corn, copper gas, etc.
- Trading of news is also allowed.
Depending upon the asset class being traded, you can choose a time frame of hourly, daily and weekly for binary options. Hourly options are ideally suited for a day trader who check out the market all the time. Daily options are good for traders who are hedging stock, forex or commodity. Weekly options are expired in every Friday noon and suitable for swing traders. Event based contracts expire when the news is released.
Some benefits of trading through binary options are:
- The risk in the binary option is capped and so is your loss. Maximum loss can be of cost of trade.
- In stable markets, it is difficult to make profits in direct stocks; however, with binary options you can still make good profits despite hardly any movement in the index.
- It offers a high reward to risk ratio compared to other financial instruments. If you buy a binary option at $20 then you can either gain $80 or lose $20, giving you a reward to risk ratio of 4:1.
- Maximum cost of trade can be $100, thus making it affordable for small traders and newcomers as well.
- Even though your maximum gain is capped at $100 per contract, you can trade multiple contracts of the same asset to maximize your gains.