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What Is A Binary Option?
What Is A Binary Option?
For people that don’t have a lot of experience in trading and investment, some of the stereotypical images and ideas people have of this world are executives in suits, shouting trading orders over phones, sweating over computers and making huge amounts of money over seemingly nothing. That’s the traditional world of stock and commodity trading that has garnered both a certain amount of cynicism, as well as a reputation for making vast fortunes for people that understand the system and know how to exploit it.
But in the 21st century, trading has changed a lot. It’s not just in the hands of the wealthy, and it’s not just managed by expert investors working at large firms that simply act on the behalf of the wealthy. Average people, with just a little bit of discretionary income, can now be involved in trading and make their own decisions about when and what they would like to invest in. One of the more recent forms of trade that allows this is called binary options trading, and it is fast becoming one of the more popular ways for people to finally get involved in the trading world and start making their own profit.
So what is a binary option? And how do you trade it?
It’s Your Choice
A binary option has its roots in an earlier form of trading known as “options trading.” Options trading is a specific form of purchase or investment that deals with sales or purchases in advance, at a fixed price. So, for example, if you were interested in purchasing a car at $20000, and had every intention of buying that car, but didn’t want to do so today, you would put in a “call option,” to buy the car at $20000 by a certain date, and the seller would agree to sell you that car, with no changes to the price, provided that you put in some investment now. So, you put in $3000 towards the final purchase of $20000 car for two months from now.
Now, in our example, something extremely fortunate happens, and it turns out that car you are interested in buying was actually owned by a famous celebrity and is a collector’s item. It’s actually worth $100,000! However, because of the call option you put in earlier, and the $3000 investment you made, the seller has no choice but to honor the original $20000 agreement. If you buy the car now and then sell it, you will make $80000 in profit.
On the flip-side, if it turns out that the car was mostly fixed cosmetically to look good, you’re stuck. In actuality, it’s worth only $5000, but because of that call option you still have to purchase the car at $20000, or allow the purchase period to lapse without paying, and forfeit the original $3000 you invested initially. The same works with a “put option,” which is where you agree to sell something at a fixed price. If you think the price of something you own is going to fall in price, you “lock in” a sell price, so that even if prices drop everywhere else, a buyer must purchase your asset at the fixed put price. Unfortunately, this also means that if prices start rising, even if you now know your asset is worth more, you have to sell it at the agreed upon price.
Going Binary
A binary option works along similar principles, but is even simpler. You still have call and put options, but you are no longer buying or selling an actual asset. Instead, you are speculating. That is, you are making a prediction about how the asset will perform, and if your prediction is right, you make a profit.
So, rather than buying a stock, commodity or currency and then hoping prices rise in the meantime so you can buy and enjoy savings, you just want prices to rise. If you make a call trade and prices rise, like you predicted, you make a profit. If you make a put trade and prices drop, as you predicted, you still make a profit. You are no longer tied down to needing some relative difference between current pricing and the price you buy or sell an asset at, because there is no asset ownership.
As long as your prediction about an asset’s performance is correct, you can make money with a binary options trade. And this is why binary options are growing in popularity. Not only is it much easier to make an “up/down” trade, the amounts of money required are smaller. You only need a few hundred, or even a few dozen dollars to make a trade, as opposed to tens of thousands. You can also do the trading yourself, on your own computer, rather than trust it to brokers who must act on your behalf.
Binary options trading is a new way to trade, and it’s more accessible, more easy, and more fast than the older forms. And that’s why more people are trying it.
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