Binary options are considered the simplest form of investment instrument compared to equities and other financial markets. It is easier to trade binary options than to trade in the foreign exchange market as it allows investors to participate in trades with as low as US$ 100.
There are two kinds of binary option transactions: the cash or nothing and the asset or nothing option. In the cash or nothing method the investor receives a fixed amount or payment if the option lapses in the money. For the asset or nothing option, the investor gets to be with the asset agreed upon. This can be in form of securities, foreign exchange or commodities.
A simple example of a cash or nothing binary options transaction would be a cash-or-nothing call option for a particular company’s stock at $500 with a binary pay off of $ 2,000. If during the maturity date the stock of the company is trading at $500 or above, the investor gets paid $ 2,000. If the stock trades below $ 500, the investor gets nothing.
Binary options in the forex market
In the foreign exchange market, binary options for currencies or binary currency options are transacted over the counter (OTC) given the absence of a centralized foreign exchange center. Binary options deals normally follow the fixed payout practice but unlike the equities market the forex the condition of the option normally are based on the price movements of a currency.
The most practiced form of binary options in the currency trade is the “above or below” method. An investor can invest in a dollar amount (instead of the larger lot size) on the price movement of a currency pair. A list or strike price will be established and investors will speculate on whether the rates will move “above” or “below” the strike price. Currency markets normally require a minimum of $100 as to participate in this form of binary options. Binary options of this nature normally have an expiry period which can be as short as few hours or as long as month.
Range option is also one of the many binary options trade available today. Instead of speculating on the up and down trends, the range binary options allow traders to bet on the hitting or missing a currency’s particular price range. Payout is done whenever a trader makes a “hit” (within the agreed range) or “miss” (out of the agreed price range).
The one touch option is another variation of earlier binary options. Pay off is made if the underlying market touches a specific point throughout the duration of the option. Normally binary options of this nature pay higher if the market touches a range.
Why investors go for binary options
Simplicity and lower risks levels are among the major reasons why traders and investors are attracted to binary options especially in the foreign exchange market. It is an either you earn or lose proposition. The rules are pretty straightforward with not much monitoring to be done aside from monitoring option expiry and other conditions. Binary options also are traded on the actual price instead of price differentials. Binary options also amplify profits because small movements earn the same gains as that of the large trades. Investors know how much they are going to make or lose at the onset.
Binary options and the future of trading
Binary options will continue to be a very good investment option for forex traders and investors. Given its numerous and varied benefits, the binary options market is expected to grow further. New and current online trading platforms have started to incorporate technical analysis tools to help investors look for opportunities and other possible profit sources. Brokers are now offering valuable advice to clients on how to use binary options to increase returns to their investments.
Experienced binary options investors and traders are urging fellow market players to take time to understand and develop sound investing strategies. They can combine technical analysis tactics along with fundamental analysis to create new revenue streams. For example, releases of important export and trade flow reports combined with diligent observation of the technical indicators for specific currency pairs can create openings to earn from binary options on the movements of such currencies in within a specific time frame.