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How to Invest in Binary Options

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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.

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 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.

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 will 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. 

Commissions
$0 $6.95 for OTC Stocks
Account Minimum
$0
Get started securely through TD Ameritrade’s website
Commissions
$0 $6.95 for OTC Stocks
Account Minimum
$0
1 Minute Review

This publicly listed discount broker, which is in existence for over four decades, is service-intensive, offering intuitive and powerful investment tools. Especially, with equity investing, a flat fee is charged, with the firm claiming that it charges no trade minimum, no data fees, and no platform fees. Though it is pricier than many other discount brokers, what tilts the scales in its favor is its well-rounded service offerings and the quality and value it offers its clients.

Best For
  • Novice investors
  • Retirement savers
  • Day traders
Pros
  • World-class trading platforms
  • Detailed research reports and Education Center
  • Assets ranging from stocks and ETFs to derivatives like futures and options
Cons
  • Thinkorswim can be overwhelming to inexperienced traders
  • Derivatives trading more costly than some competitors
  • Expensive margin rates
Commissions
$0 flat rate, includes closing costs
Account Minimum
$0
Get started securely through Tastyworks’s website
Commissions
$0 flat rate, includes closing costs
Account Minimum
$0
1 Minute Review

Tastyworks is a sophisticated options and futures broker aimed toward experienced traders. The platform was designed by the founders of thinkorswim with functionality and precision for complicated options trades and strategies. Tastyworks offers stocks and ETFs to trade too, but the main focus is options. 

Options on tastyworks are only charged a 1-way, $1 commission —  far cheaper than almost all competitors. Commissions on futures and micro futures are also affordable, and there’s no minimum required to open a cash account. It’s $2,000 if you want to use margin.

Best For
  • Options traders
  • Futures traders
  • Advanced traders
Pros
  • Powerful platform inspired by thinkorswim
  • Multiple order types and strategies
  • Cheap options commissions
Cons
  • Advanced platform could intimidate new traders
  • No demo or paper trading
Commissions
$0
Account Minimum
$0
Get started securely through Webull’s website
Commissions
$0
Account Minimum
$0
1 Minute Review

Webull, founded in 2017, is a mobile app-based brokerage that features commission-free stock and exchange-traded fund (ETF) trading. It’s regulated by the Securities and Exchange Commission (SEC) and the Financial Industry Regulatory Authority (FINRA).

Webull offers active traders technical indicators, economic calendars, ratings from research agencies, margin trading and short-selling. Webull’s trading platform is designed for intermediate and experienced traders, although beginning traders can also benefit.

Webull is widely considered one of the best Robinhood alternatives.

Best For
  • Active traders
  • Intermediate traders
  • Advanced traders
Pros
  • Commission-free trading in over 5,000 different stocks and ETFs
  • No account maintenance fees or software platform fees
  • No charges to open and maintain an account
  • Leverage of 4:1 on margin trades made the same day and leverage of 2:1 on trades held overnight
  • Intuitive trading platform with technical and fundamental analysis tools
Cons
  • Does not support trading in options, mutual funds, bonds or OTC stocks

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. 

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

Binary options provide traders 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. 

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