Binary options or “binaries” let you easily speculate on financial markets with limited downside risk no matter whether you are buying or selling them. The buyer of a binary option generally pays a fixed price or premium up front to possibly receive a fixed payout if their view turns out to be correct within the lifetime of the binary option.
While the binary options seller receives the premium, they may have to pay out a fixed sum to the holder of the option if the binary is exercised. Most retail traders are just permitted to purchase binaries, meaning that trading binary options does not require you to consider which side of the sale you prefer.
A variety of binary options exist, although the most common and simple options of this type are known as “up” or “call” binaries generally bought to take a bullish view on the underlying market and “down” or “put” binaries purchased to take a bearish view. Your view will need to pan out within the lifetime of the binary option, or it may expire and ultimately be worthless.
Some binaries allow you to select 2 strike prices and are known as “range,” “boundary” or “tunnel” binaries. Say you think the market will move notably within a given time frame, then you might buy an “out range” binary that provides a payout if the market moves outside the range you specified. Alternatively, if you think the market will remain stable, then you can buy an “in range” binary bounded by a specified range.
Other variants of the binary option are one-touch and double-touch binary options. These options either payout or cease to exist as soon as the market touches either 1 or 2 preestablished trigger points respectively.
Since binaries are derivative financial instruments typically used for short-term speculation rather than for long-term asset appreciation, they tend to suit traders more than investors. Read on for more information about how to get started trading binaries.
Step 1: Get Educated About Binary Options.
Trading binary options is not as simple as it seems, and traders are often tripped up when they think they can simply jump into the market. Buying an up or down binary seems rather straightforward, but since a variety of binary options exist, you should really learn about how and when to use all the different types of binaries available to you. You can do this by taking a binary options trading course or researching the subject.
You'll also need to understand all the specific details and operational mechanics of any binary option contracts you intend to trade. Missing an expiration or trigger, trading the wrong type of binary option, not being able to sell a binary back at the right time or not understanding how much risk you are taking can cost you a lot of money if you’re not paying attention.
Step 2: Get a Device Connected to the Internet.
Binaries generally trade via online trading platforms, so you’ll need to get a fairly modern mobile device or computer connected to the internet to get started trading them. Make sure you have a dependable internet service provider, since a disconnection can be costly if you need to exit a trade.
Step 3: Select a Good Online Binary Options Broker.
Binary options often trade through specialized brokers, so you may not be able to use your existing online broker to trade binaries through and some binary options brokers may not accept clients from your country.
You’ll want to choose a well-regulated binary options broker that offers binaries on the asset classes you really want to trade. Also, make sure they offer a good binary options trading platform and have competitive prices. Depending on the broker you select, you might need to qualify to trade binary options with them.
Step 4: Open and Fund a Binary Options Trading Account.
Choose the account type that best suits your available initial deposit and trading requirements. Make sure you have enough funds deposited with the broker to cover the premium for any binary options you want to purchase.
Step 5: Start Live Trading.
You’re ready to start trading binaries once a suitable market opportunity presents itself, but remember to speculate only with money you can afford to lose. To improve your chances of success, you should aim to develop a winning binary options trading strategy as part of an overall trading plan.
Best Online Binary Options Brokers
Selecting the right online broker to trade binary options through is a key part of setting up your binary options trading business. Make sure the broker is well-regulated and has a good platform, low transaction costs and competitive pricing.
Take into account your intended trading style, how much education you will need and what tools you might need to trade binaries successfully, such as a binary option pricing model. Some prudent binary options brokers might ask about the experience you have before allowing you to trade binaries and other options. They might also place a limit on your binary options trading activities.
The North American Derivatives Exchange (Nadex) and the Chicago Board Options Exchange (CBOE) offer listed binary options within the U.S. at transparent and market-determined prices regulated by The Commodity Futures Trading Commission (CTFC). Some foreign binary options brokers and banks allow unregulated over the counter or online trading in binary options, but the risk of scams and off-market pricing exists.
Make sure any binary options broker you choose is right for you and that you avoid unregulated brokers that might be running a scam or have unfair pricing terms. Benzinga has put together a helpful table below comparing the top online binary options brokers you can approach to set up a trading account with them.
Advantages of Trading Binary Options
Trading binary options has several significant advantages over just trading the underlying asset or conventional options. Some of them are discussed below.
- Leverage: Binary options are not traded on margin, but they allow you to receive a substantial payout with relatively little money if your market view turns out to be correct.
- Well-Defined Risk and Possible Reward: Since binary options have a fixed premium and a fixed payout, the risk/reward parameters of a trade are known at its initiation.
- Cash Settled: Binaries are generally cash-settled, so you don’t have to worry about getting stuck with an unwanted position in the underlying asset that you have to trade out of as you could with traditional options when they are exercised.
- Potentially Higher Returns: Trading with binary options in short time frames when you believe you have an informational advantage can result in higher returns compared to trading regular options.
- Easier Than Forex. While trading binary options can be complicated, it’s not as complicated as trading foreign currencies. You know the terms of the contract. You know if the option will produce a profit. There are ways to get out early. Options are easy to track. This sits in contrast to foreign currencies that can swing wildly due to a massive number of factors. Plus, you might hold a position on a currency overnight and lose all your money while you are sleeping.
Disadvantages of Trading Binary Options
Although binary options can seem useful when taking a specific market view, they do have some disadvantages that you might experience trading them.
- Options Expire: Unlike assets, binary options contracts expire at a given time and may even get triggered out of existence if they are touch binaries. This requires you to take a market view with an associated time frame when trading binaries.
- No Dividends: Holders of binary options on stocks do not receive or pay any dividends. This can be a disadvantage for those who would ordinarily have received dividend income from holding the underlying stock.
- Asymmetrical Pricing: Binary option market makers generally stack the odds in their favor by asking for a premium larger than the expected payout from any binary option they write. They also pay a premium less than the expected payout for any binary they buy. This pricing asymmetry means you will probably lose over time when trading binaries since you will probably be a market taker and not a market maker. The wider the asymmetry, the more you are likely to lose.
Binaries Give Traders More Options
Trading binary options provide investors with an even greater selection of ways to encapsulate a specific market view than traditional options do. Since binaries do require education to use them effectively, however, you will want to learn how to use them appropriately to benefit your trading business the most.
Remember that binary options are only a trading vehicle and you should be fully aware of the markets you plan to trade. The more you know about the underlying markets, the better your chances of successfully using binary options to make a profit. Your chosen binary options broker may provide useful educational material to train yourself with, so check that source first.
Frequently Asked Questions
Where can I learn more about trading?
Should I plan to open a demo account?
Absolutely. Most platforms offer free demo accounts for you to practice. This will let you get comfortable with the tools and analysis available, while also giving you a chance to test your strategy.
And demo accounts are just for beginners. If you’re trying to tweak your strategy or style, try a demo account again to test the waters without the risk.
What are the different ways I can speculate on binary options?
Some excellent ways to speculate on binary options include stock market averages, forex, outcomes or commodities.
What are the different parts of a binary option?
The parts of binary options involve its expiration, strike price and market average.