A binary option is an all-or-nothing financial contract. The trader who concluded it receives a predetermined amount if a certain condition is met at a certain time. Or he completely loses the funds invested in the purchase of the option.
Main features of binary options
The key point in option pricing is the expiration period. This is the time interval during which the deal is valid. It can range from a few seconds to a year. On small timeframes, the random factor is higher, on large timeframes it is minimized. The amounts do not depend on the duration. You can earn or lose big money in 10 seconds, or you can make small money in 10 months.
A distinctive feature from many other types of trading is that the trader does not buy the asset itself. In fact, a bet is made between the broker and his client on the outcome of the event. If the trader is right, then he receives a payment in the amount of up to 90% of his amount. The percentage depends on the characteristics of the asset and the generosity of the company, but it is always known in advance.
A positive quality of binary options can be considered risk management, since the buyer knows the amount that he will lose in case of an unfavorable outcome.
For the better, this financial instrument is distinguished by its availability. For example, a company has 1,000 shares. And an unlimited number of people can predict price changes for them. In addition, a share can cost $ 500, and you can make money on its price by buying an option for $ 10.
Another positive aspect is the relative ease of use. As a rule, it is enough for a trader to take into account fewer factors and indicators when working with options than with other financial instruments that require a more detailed analysis. Anyone who already has experience in trading the most popular currency pairs in trading will be able to understand the principles of options. Developers do not even create special indicators for options, since the existing ones are quite enough.
The profitability from working with binary options can also be significantly higher than from other instruments in trading. For example, the value of a share has increased by 1% per day, which will be the income of its owner. And the option buyer's profit from this fact will be 80%. However, threats of losses are growing proportionately. The share together with its owner will lose 1%, and the option buyer who made a mistake with the forecast will lose the entire amount.
Types of binary options
The most common Call / Put options. Forecasting the direction of price movement. If the trader thinks that it will grow, go up on the chart, then he buys a Call option. If it falls, it goes down, then the Put option.
One Touch / No Touch - options. Predicting whether or not the price will reach a given level during the period of the deal. If the price once reached the desired level, then how it will then change by the time the option closes, it no longer matters.
In / Out - options. Forecasting of the corridor frame in which the price will move in a certain time interval. If, according to the broker's forecast, the price remains within the corridor, he buys an In option, if it exits, then an Out option.