Binary Options 101
Maybe you’ve heard the term “Binary Option” and wondered, "What is a binary option?" Maybe you’ve heard bad things about binaries and have even seen a trader warning others to avoid them.
However, you can easily find someone who says to stay away from anything, be it stocks, leveraged ETFs, futures, forex, options, binaries or other tradeable instruments. It is important to listen to those who understand the instrument when making decisions and to be well informed.
A binary option, when traded on a US regulated exchange, is a safer way to trade due to the protection that is offered through regulators. This is not available on binary options traded outside the United States. So, if someone is referencing binary options, make sure to know if they are talking about Nadex binary options or options from outside the United States that are not regulated by the CFTC.
On Nadex, a binary option is a contract that has only two possible payoffs at expiration. It will either settle at $0 or $100. When you trade binary options, you are essentially making a True/False statement. Either the market will be above a price or it will be at/below a price at the expiration time.
Related Link: The 4 Parts Of A Nadex Binary Option Contract
If you think it will be above that price, you buy. If you think it will be equal to or below that price, you sell.
One thing any trader will enjoy is that when they are trading Nadex Binary Options, they have capped risk. You always know what your maximum profit or loss will be. They have a low collateral. Because there are many markets in which to trade, there are multiple trading opportunities in both volatile and flat markets. There are hourly, daily and weekly expirations, so you can place several trades in a day.
When you trade Nadex Binary options, you have the protection of capped risk but without the worry of being stopped out. The market may move in your desired direction and then move against you, but you haven’t lost or won until expiration. If you hold to expiration, as long as you have answered the yes or no question in agreement with the settlement price, you will be profitable. If not, you have limited risk.
However, you don’t have to hold the option until expiration. You can exit at any time. So, if the market is moving against you, and you feel like it’s not going to change to be in your favor, you can exit and cut your losses. Likewise, if the market is in your favor, but you think it’s going to move against you, you can exit and take your profit. Many traders are totally unaware that it's possible to close a binary before expiration and this is where the biggest edge comes from.
Nadex Binary options are derivatives; they are based on an underlying instrument. The underlying market may be the E-mini S&P 500, a commodity like Gold or a currency pair like GBP/USD. The binary’s price will be based on an underlying market.
To practice trading binaries on a free demo account, go to www.nadex.com and click on trading demo, trading account. Its important to consider a variety of things when choosing where to trade binaries.
Apex Investing Institute offers free education, effective tools and a room community of seasoned as well as up-and-coming traders. Together in a supportive environment, along with tools to trade with ease and convenience, traders of all levels can learn how to trade Nadex binaries as well as futures, forex, stock and options, and gain an edge for successful trading overall. To learn more about how to trade binary options in-depth and for binary options signals, trading strategies, tools and trade rooms see www.ApexInvesting.com, a service provided by Darrell Martin.
The following article is from one of our external contributors. It does not represent the opinion of Benzinga and has not been edited.