Binary Call Option Explained

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What Are Binary Options Trading? – Binary Options Explained With Example

Binary Options trading are known for their simplicity and all-or-nothing nature. Moreover, a few reasons are behind to give this trading type name binary option. Options are derivative instruments. It can be traded as forex pairs, cryptos, stocks, indices, commodities, etc.

Furthermore, for traders, it is a lucrative trading type because of it’s quick and high return percentage. But, according to the research, binary traders should pay close attention to the rules of trading before diving with real money.

So, consider this article as a guideline for beginners and hence, we will keep it as simple as possible. Let us start with the binary definition first.

What Is Binary Options Trading?

Abe Cofnas is a thought leader and analyst in the financial industry. We took a line from his book to explain the actual meaning of binary.

“The binary option is called binary because it fits the condition of being either right or wrong-all or nothing.”

On the other hand, the exotic option allows a trader to speculate on the price movements of various instruments. To trade binary option, you don’t need to purchase an underlying asset.

You rather predict whether the price will increase above, or decrease below the strike price or purchase rate. The strike price is the price, at which traders trade underlying assets. Market price must increase or decrease, by the time the trade expires.

The expiry period for binary options is very diverse. The time frame starts from 30 seconds and lasts up to a year. After prediction the price, you will select the call or put option, depending on the asset price movement.

If you guess accurately, you win a payout. But the wrong prediction will give you nothing. It is required to mention that the payout rate differs from asset to asset and broker to broker.

Speaking of assets, there are multiple trading instruments that you can trade as binary options. Before selecting any pair, find some strategies and rules on how to trade binary options .

We will explain all the terms and facts of the binary option below that will give you more knowledge to understand.

Binary Options Explained For Beginners

Trading in options are based on the value of underlying assets, such as title to a property, while the property is the underlying assets, while the title is traded, there is no physical possession of the assets. Binary options is a type of option are so called because of the twin (binary) nature of their outcomes; that is 0% or 100%. Also called all or nothing investment, fixed return option (FRO) and digital options. These types of investment are quite easy to understand and engage in. For a beginner, there are several binary option brokers out there, but I would recommend HighLow or Binary Cent as the broker of choice.

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Binary Options Returns Explained

With binary options, you are guaranteed up to 85% return on your investments, although, traditionally it pays between 61% – 85%. Though most brokers pay between 70% – 75%. The difference being their commission, as no other commission is charged. The maturity time can be anything from 10 minutes to one month. For instance if a buyer believes that gold will reach $1,500 an ounce by 14.00 EST, he buys (Call option) if the option materializes, he gains, the gain will depend on the invested amount and the rate being offered by the broker. However, if Gold does not reach $1,500, by the expiry time, he gets nothing. A Put option works in the reverse direction. If the trader believes that Gold will fall to $1,500 by 14.00 EST, he sells. If the expected outcome materializes he gains, if not he loses. The nature of binary option has made people to erroneously refer to it as gambling, because of its Yes or No nature. However, gambling depends on luck and chance, while binary option trade is pure analysis of market fundamentals.

For more basics, I recommend reading our Binary Options 101 page.

Just Starting Out

For a beginner, first you need a PC with an internet connection, a very fast PC and a reliable internet connection will be ideal. Then register with a broker of your choice; brokers can be found on the internet, most brokers offering binary options are under the regulatory oversight of a regulatory authority. It is important to inquire about the regulatory status of your desired broker to avoid being registered with unregistered brokers and the unpleasant consequences it entails. Complete the registration formalities and in no time, you are already trading.

The same goes for binary options software. You always want to end up with a software that is regulated. Systems we’ve had issues with include Binary Robot 365, Option Robot and Binary Option Auto Trading.

Binary options, opportunities exist to trade in stocks such as Apple, Microsoft, Coca-Cola etc.; currency pairs, e.g. AUD/USD, or EUR/JPY, indexes such as Dow Jones, NASDAQ or CAC; or commodities such as copper, gold, oil, and silver.

Binary Options are Easy to Trade

Since it is web based trades, you are presented the opportunity to either trade on the go or to download the software, though this option is broker specific. As the name suggest all or nothing. For instance if you wish to trade copper, you can place a Call option that price of copper will be $4 by 14.00 EST, if it works out, you gain if not its loss. However some brokers give back a certain percent of the investment back as rebate or refund, usually between 10 -15%.

As a form of investment, binary option offer several advantages. For one, the returns are limitless, only very few investments match its rate of return. With 85% return, it becomes easy to increase your wealth. Also, the maturity time is relatively short. From just above 10 minutes to one month; meaning that in just 15 minutes, you can receive great returns on your investment. The market is also open 24/7, unlike other markets that are closed on weekends and public holidays. Besides, weekend trading attracts a far higher yield on investment. However, investments are usually a risky affair, profits are never guaranteed.

Binary Options Explained

Binary Options are options that only have two possible values upon expiration. Either the option will pay a predetermined value for being in the money, or will expire valueless in the same way traditional option contracts will. Predetermined payout values normally vary between 60%-85% but may be higher. Binary option times to expiration are typically much shorter than traditional options.

Binary option trading has recently become more popular amongst day traders. Binary options have also have received some bad press lately, mostly for brokerages opening accounts from clients who did not have any risk capital to trade with. Despite some unscrupulous brokerages making a bad name for them, binary options are a legal instrument, and can create extremely nice returns for successful traders.

Compared To Traditional Options

Binary options are not contracts traded over open secondary markets like traditional options. Binary options are a contract between you and the brokerage. The brokerage states a payout if the option expires in the money, at Tradorax usually 80% but the amount varies, and the option will expire worthless if it expires out of the money.

Usually the two options a trader has are to either buy a put or a call option, and the strike price is the exact price of the security at the time the trade is taken. Essentially a trader is simply betting on whether the security will be higher or lower than the current price at the time of expiration. It does not matter how far in the money a trade becomes, or if it is even only 1 cent in the money, the option payout price will be the same. Because of this it is obviously in a traders interest to take low volatility but highly probable trades.

Who Makes Money

A brokerage makes money over time because with a big enough sample size, they will win about 50% of the time and all traders combined will win about 50% of the time. Below is the payout tree to a trader with an 80% return for each winning trade, a typical payout.

Obviously for a binary options trading strategy to be effective for a trader, they must win on at least 56% of trades, given an 80% payout on winning trades. For this reason demo accounts are a necessity for new traders who need to work on developing a strategy. Choosing only the most probably trades are vital for binary option traders, since it does not matter how far in the money a trade becomes.

Short Time Frame

Binary option contracts have very short time to expiration most of the time. Some brokers offer time frames as low as 1 minute, and may offer as long as a couple weeks. Because the time to expiration is extremely short the vast majority of the time, binary options are very convenient for traders who do not have all day to watch trades. Trading can take place during a lunch hour, or whenever someone has a few minutes. The short time frame also makes it very enticing for traders to trade more often than they should, and traders must remember to maintain a disciplined approach.

Funding and Withdrawing

After the option expires a traders account is immediately credited with the payout amount or loss, and there are no restrictions on when a trader can withdraw money like traditional brokerage accounts. There are also no restrictions on funding accounts, and this means day traders must be cognizant of the amount of money they are putting at risk, as they must with any strategy.

To open your own binary options account, click below to use our preferred broker.

Binary Options Terminology Explained for Beginners

If you want to invest in binary options, you’ll most likely encounter many terms which do not seem familiar. That’s why we’ve assembled this material so you will be able to understand better each of them.

The most important terms you should know

Put option – it is an agreement between two parties (a buyer and a seller) that gives the person who buys the put the right to sell a specific financial instrument at a specific price and time. More simply put, it is bought by a trader who expects the price to fall in value before the option will expire.

Call option – it is an agreement between two parties that gives the person who buys the call to buy a specific financial instrument at a specific price and time. Basically, it is bought by a trader who expects the price to rise in value before the option will expire.

Underlying instrument – an asset upon which an option is structured. Examples: stocks, currency pairs, commodities etc.

Market price – the current price of an underlying instrument.

Expiry level – the price at which the option is located when it expires.

Early closure – The ability to close an option before expiration. This is not offered by all the brokers and it might have some commissions attached to it.

Strike price – the price accepted at the placement of the option which will be used to determine at the expiry if you are in the money of out of money.

In the money – It generally refers to a situation when the market price is above the strike price, for a call option and below the strike price for a put option.

Out of money – It generally refers to a situation when the market price is above the strike price, for a put option and below the strike price for a call option.

With that being said, the terms above are the ones we consider you should know when trading binary options. Hope you found it useful. Also, we’ll do a part two in the future, with more advanced terms.

Meta description: Find out what are the most important terms related to binary options. See what each of them mean, so you can understand better the process of trading binary options.

Best Binary Options Brokers 2020:
  • Binarium
    Binarium

    The Best Binary Options Broker 2020!
    Perfect For Beginners!
    Free Demo Account!
    Free Trading Education!
    Sign-up Bonus!

  • Binomo
    Binomo

    Trustful Broker!

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