In order to answer this question we see that binary options are simple fixed reward contracts. It means a trader receives either a fixed profit or fixed loss. Binary options give the traders a simple “One or the other choice”. They are very simple to trade because of their design.
With binary options, there are two possible outcomes, “Up or Down”, for instance. Factually, there are just two outcomes possible, thus that’s the reason why they are named “binary”. Right now, binary trading is strikingly hot because it is very easy for anyone to do. Therefore, it can be said that binaries are the future of online trading.
An up or down binary option is the most simple binary trade.
Do you think the price of something, for example gold, is becoming higher or lower in 1 hour? If you think higher, you “call”. Otherwise, if you think lower you “put”. You either win your trade and get your return; it is up to 90% in some trades or even lose the amount risked up front. Then, one hour later, you will see your binary trade reaches the expiration time. So, at this time, you are either in the money or out of the money.
Well, it is that simple! Binary Options Trading is designed to be easy for everyone to trade!
For Example, Trading Google Stock With an Up / Down Binary
You think that Googles stock is going up and it will be trading at or above $670.39 as of a 4:00pm EST today.
You make up your mind to make a trade based on your belief. As you believe the price is going up, thus, you place a ‘Call’ binary trade. On this trade, you risk a $200. Notice that this is the entire amount of money you are risking. Of course, you cannot lose more than $200. The best point of binary options is to show that your risk and return are fixed and also known up front. Therefore, you can never lose more money than your trade amount. Additionally, your return is known up front, so it is clearly that you know how much money you will make if you win.
With this example, your payoff is a 70% return if we finish in the money. If we lose, there is a 10% return, or rebate. Obviously, we are going to risk $200. 70% of $200 = $140.
Our payout is $340 if we win.
We get our $200 back plus $140 more for an entire payout of $340. Most binary agents usually offer between 70-90% payouts. The good binary trading sties, at least, relied on traders today offer these kinds of returns.
Our payout is $20 if we lose.
We receive a 10% rebate on our risked amount. 10% of $200 = $20 ‘out of the money return’.
So, in order to recap, if you win that means you get your fixed return of $340. But, if you lose, you lose your initial trade with the amount of $200; however, get a 10% rebate of $20. This makes it a net loss of $180.
The price, in which you are betting Googles stock will close above, $670.39, is known the ‘Strike Price’. And the expiration date or maturity date is the date and time that you select as part of your trade.
If the price ends above $670.39, it means you win the trade. But, if it ends below $670.39, it is obvious that you lose the trade. In the money or out of the money. Now, the trade is done and your payout is virtually instantly made to your account.
That‘s the way it is. It is really simple.
It’s no matter how much Google closed above $670.39. It’s only a matter that it closed above that price. Regardless of how far an underlying assets price moves your payout is the same. This is one reason that many people definitely love trading binaries. Simply, you only pick from a one or the other option and hold on for the ride.
The above example is the most popular kind of binary option traded nowadays. It is an up/down option and noticed in the field of industry as cash or nothing trade. Honestly, you make the cash or you receive nothing.
There are more styles or types of binary trades available for you. Generally, they all offer a one or the other choice and also a fixed risk/return. Let’s have a look at.
Binary Options – Types & Classifications
In this part, we’ll depict the most popular binary option trades. You’ll have a chance to learn how traders are using them to carve out benefits of up to 80 percent or more (sometimes, it is much more). Along the way, it is helpful to keep in mind that “binary” means “one or the other.” The concept is used systematically for the different types of binary options that you’ll experience. Finally, we’ll supply a short list of famous binary options brokers offering access to the instrument types that you’ll learn about below.
There are many different classifications of binary options trades. Commonly, all of these trades have that basic definition; still, they also differ based on a number of elements comprising the type of payout as well as the conditions of the trade. In these days, binary options are known as the latest trend and online trading. Many online companies promise that you can create a lot of money trading binary options, but do you know what they are?
Binary options are trades that you can make because they have a fixed risk and reward. Also, you can look at them as another way of trading an underlying financial instrument, for you can trade currencies, stocks, commodities, and other assets as binary options.
“Binary options” is the term making reference to the way you’re trading the underlying asset.
Let’s have a closer look at the Types of Binary Options.
- Calls vs. Puts refer to whether you select Up or Down. This is the most common type.
- Touch or No Touch relates to whether you think that the price will touch or not touch a certain point
- Double Touch/Double No Touch looks similar to the other but it has two points to contend with
- Range Option – Boundary Trading or Tunnel Betting – relates to whether you think that the price will end in or out of a price range
In spite of binary trading has been popular over the past couple of years, many active options traders are unacquainted with them. This new, exciting area of trading is winning converts every day. Traders see in advance how much they stand to lose, and how large a return they’ll know if their options expire in the money. Additionally, they have several types of binary options in their hands which support them many ways to execute their trading strategy.
Call vs. Put – High/Low Binary Options – Up Or Down
These are probably the most popular of all binary options since they are the easiest to understand and trade. Commonly, call and put options are grouped under the category of ‘cash or nothing’ binary options for the reason that at the end of the set time period, the investor will either receive a cash payout or nothing.
Calls Vs. Puts – Up Or Down
Call options are also seen as digital options and are a quite simple form of binary option. When a buyer believes that the asset price will rise over a period of time, he or she will choose to purchase a binary call option. For the success of a call option, the asset price has to rise above the price that the asset was at when the buyer placed their bid. This is called the strike price.
A put option is the accurate opposite. Instead, the buyer is forecasting the asset price will drop below the strike price at the time when the option expires. If this happens, the buyer gets the full cash payout given by the option.
These instruments are referred to by a few names, comprising call/put, up/down, and certainly, high/low binary options. Most evaluate that they are the simplest of all binary options types. Essentially, they are a bet on if the price of an asset is going to move up or down. This type of instrument can be found at nearly every top binary options broker.
In order to make it clear, a call is just a contract in which one party has an agreement to sell its ownership stake in an asset at a specified price to another party. In case the price of the asset rises, the second party (for example the buyer of the contract) benefits. A put is a same type of contract. There is a difference which is the buyer of the contract benefits in case the fall of the asset’ price.
Boundary Or Range Options
These instruments relate price ranges, or boundaries. If you correctly predict that the price of the underlying asset will fall within a specific range, or even float outside of it, you’ll get the posted return on your investment. You’ll lose your investment (excluding a rebate, if the broker gives one) if you predict incorrectly.
Seen as tunnel bets and boundary betting, range options work by selecting whether a price expires within a specific price range. For me, I think the range options have the most types of synonyms. Besides, they are also seen as in and out options as you are either betting in the range or outside of the range.
Range options are less popular than high/low binary options. They show a higher risk of loss, however, also offer a higher return. Still, it’s not uncommon for potential returns on boundary options to climb to 300% and even above.
Touch/No Touch Binary Options
For these instruments, both profit and loss are confirmed by your ability to predict whether the price of an asset will reach, or “touch” a particular price. When the price touches the target price and you predicted it would do like this, the trade closes and you get your expected return. In contrast, the trade still remains open until it expires out of the money.
Touch or No Touch Options
With this style of binary option, it is simple and popular. They operate by having a certain trigger price point. If you think that the assets price will hit that price point in a specified time frame you must bet on the touch. If the price touches that trigger, then the trader gains and the trade is over. If the trader bets against the price touching a specified point, then the opposite is true.
If you choose a “no touch” trade, and the price of the asset touches the barrier, the trade closes instantly at a loss. If you had chosen ‘touch’ trade and the price barrier was hit it would result in a gain instantly.
Double Touch / Double No Touch Options
These binary options operate on the premise similar to touch/no touch instruments. There is just one difference which is two price barriers are in use rather than only one. The two prices form high and low points between which the price of the asset tends to fluctuate. Both profit and loss are decided by your guessing ability whether the price will “touch” either barrier.
If you select a “double touch” trade, you can get a payout if the asset reaches or breaches either target price. Otherwise, if you select a “no double touch” option, you can get a payout if the price remains between the barrier, touching neither of them.
Classification via Payout Type
It shows two different types of binary options trades as classified according to the payout. Cash or nothing is a trade that the participant either gets a fixed amount of cash for winning or nothing for falling to win. So, remember that “receives nothing” doesn’t completely depict the consequences of a loss. Generally, the trader forfeits the whole risked amount; however some brokers have rebates on losses.
Asset or nothing is only similar to the cash or nothing type, except that the trade pays out the value of the underlying financial instrument instead cash. All these types of binary options are not as widespread as the very common cash or nothing style of options.
Other way of classifying trades can be referred to American-style or European-style trades. For American-style trades, the options can be applied as soon as the underlying asset hits the strike price that means you don’t have to wait through the whole expiration or maturity period. In European-style trades, you don’t gain anything if the asset doesn’t hit the strike price (or trade above or below it as you wagered) at the expiration time. It means if the strike price is hit before the maturity date is reached and then the trade goes back against you, so you lose. On the other hand, this type is more specific in which timing is concerned.
A lot of people classify binary options by the type of trade which is occurring.
Cash Or Nothing Binary Options
There are two types of instruments including those paying in cash and those that pay in the form of the underlying asset (supposing the trade expires in the money). For the instruments, you’ll find at the binary options brokers that we suggest representing the former known as cash or nothing binary options.
Cash Or Nothing Options
With cash or nothing binary options, they refer to the truth that you either end the trade in the money our out of the money. You either gained money or lost your money. The real cash or nothing binary options are formed in this accurate way, with a fixed return if you win and a loss of your trade amount risked in case you lose. A few limited brokers give rebates on losses (AnyOption gives 15% rebates) so the cash or nothing name is not 100% correct.
It means you’ll get a percentage of your investment if you accurately guess the movement of the underlying asset of an instrument or its price when the instrument expires. If you guess wrongly, of course, you’ll lose your investment.
Most types of binary options are based on this “cash or nothing” premise. The percentage return that the trader gets if the instrument expires in the money is posted by the trade. It is known before the trade is implemented. This is a crucial advantage over other types of trading where the amount of potential benefit or loss is unknown.
Cash Or Nothing With Rebates
This is a dissimilarity of the conventional cash or nothing instrument. Many binary options brokers give rebates to traders having options expire out of the money. In most cases, the rebates range between 5% and 15% of the invested amount. For instance, if you invest $100 in a trade expiring out of the money, and the broker give a 15% rebate, you would just lose $85. Factually, not all brokers offer rebates. For those do not offer rebates, they usually expand other perks, for example, there are higher returns for trades that expire in the money.
Cash Or Nothing With Buy-Out Clause
Some binary options brokers also give a feature permitting you to close your trade within minutes of carrying out it. It is seen as a handy option if you feel that you guessed wrongly regarding the price movement of the option’s underlying asset. By leaving the trade early, it is helpful to limit your losses.
Besides, you can use this feature in order to lock in early profits on a trade. Assuming you predict correctly about the price movement of the asset, but doubt it may lead to the opposite direction prior to the instrument’s expiration. The action of closing the trade early can help you to realize early benefits, and keep away from forfeiting them if the asset turns.
Some examples of this buy-out clause comprise AnyOption.com’s “Take Profit” feature and 24Option.com’s “Early Closure” feature.
Asset or Nothing Binary Options
If on the stock, you traded an asset or nothing binary option, instead of getting the amount of cash you wagered, you’d instead get that similar value in stock in the company. There are a lot of differences on binary options trades, for example, you may bet that a specific price won’t be touched. You can even specify multiple prices that you think will or will not be reached in a given time period. The regulation which govern binary options trades differ depending on where you’re trading. The different regulation concerning expiration dates are related to European- or American-style trading.
Are You Ready To Start Your First Binary Options Trade?
You have already known the basics, and you’re willing to learn more with our binary trading guide. You’re not ready to begin trading. For the purpose of trading profitably, it is necessary for you to come up with trustworthy, appropriate methods to win your binary options trades. This means there are still plenty of testing, research, and demo account trading. In case you can come up with an appropriately beneficial method and try to put it into practice, it is potential that you can trade binary options for a living.
Top 4 Binary Options Brokers With Various Options Types
The binary options types offered by different brokers may have little effect on which brokers you finally work with. Many depend on whether you intend to carry out the instrument types depicted on this page. A greater part of traders choose high/low binary options, all but paying no attention to other types of trades. However, some are really want to implement high-yield instruments, boundary binary options, for example. We’ll introduce you which brokers offer which instruments, also other features and perks as following.
First of all, it is 24Option, known as one of the highest-rated binary options brokers. It offers a wide range of assets for trading and high payouts. The returns on some instruments exceed up to 300%. Additionally, with the high/low options, they can help you to find touch/no touch and range binary options. Moreover, you’ll receive up to 15% of your investment back in the form of a rebate on some out of the money trades. You can visit 24Option.com today and start at one of the most common binary options brokers.
Secondly, it is TradeRush, minimum $10 trades, a large range of assets, and also a quite variety of option types have traders rating TradeRush among the top binary options brokers. When you create your account, you can implement call/put, touch/no touch, and 60-second options. They also supply a useful feature named Option Builder, which permits you to tailor your trades in order to better accommodate your trading style. The average returns on in the money trades at this broker range between 70% and 81%. Take your time to visit TradeRush.com today. After that, you can open a free demo account (it is no deposit required), and have a test drive of their trading platform.
Besides, MarketsWorld offers the lowest minimum deposit of just $20. Particularly, they offer a 100% free demo trading account only for an account registered at their website. It does not require deposit or credit card information to get your practice trading account. They are also regulated by a reputable regulatory authority in the Isle of Man (UK). Thus, your deposits and funds are in safety at MarketsWorld. Read my review of top rated binary broker about MarketsWorld for your information.
If you’re a newbie in the field of trading binary options, we recommend that you should learn the ropes with up/down instruments before starting to venture into higher-yield options. You’ll find this information at each of the four sites that we suggest above.