Binary Options Explained

Binary options are a new form of investment recently made available to the public. You can see a lot of advertisement about them on the Internet, but for most people it is still unclear what they really are.

In a nutshell a binary option is a product where you trade your view of the market. There are different variations of binary options, so let’s take the example of the most common format, the up/down option, also known as high/low. If you think the market will go up, buy the up option. If you think it will head south, buy the down option. If you are correct you will make a nice return, usually around 80%.

To better understand how this works, let’s discuss the benefits of trading binary options. There are many advantages to trade binaries versus more traditional financial instruments.

First of all such trade are more simple than buying or selling regular assets. As you do not need to carry a position for an undetermined length of time with all the ups and downs of a portfolio, such trades are easier to handle. Here a position is either right or wrong, hence the name binary. There are only two possibilities and there will be not swings in value, except if the position turns from wrong to right or vice versa.

As these trades which are short-term in nature have a known expiry time, you do not have to worry of carrying losses with the psychological uncertainty of not knowing the best time to exit the trade, and the worries that go with it. With binary options the exit strategy is all taken care of for you from the moment you enter the trade, so this is something that does not interfere with your well-being.

Another interesting benefit is that binary options brokers offer the ability to trade a large choice of asset classes that are not normally available under the same roof when you deal though a more traditional broker. Indeed you can trade major international stocks, but also stock indexes, currencies and commodities. Note that not all regular brokers will let you trade international stocks like Italian stocks or Japanese stocks. Plus if you want to trade stock indexes these are normally traded as futures with many constraints, or ETFs. Likewise currency pairs are not normally traded at the same location, and commodities are a completely different market. But not so with binary options as you can trade all of them from the same interface.

Finally the other benefits are that the potential returns can be very high, like 80% of even much more for very specific options with a low chance of occurrence. But to be honest there is no return without risk. These instruments offer good return with a large element of risk, so buyer beware. In order to be successful trading these novel financial tools, you must know the markets well. You need to follow news closely and be able to anticipate when the markets will be quiet or when a new trend is likely to develop. And you need to master the technical aspects, such as purchasing the options with the best ROI and understanding support, resistance, breakouts and other chartist techniques.