What are Binary Options?

Binary options are an exciting new trading and investment avenue that has emerged in the market with much fanfare.

The underlying principle behind binary options is the fairly large assured returns they can offer if and when specific criteria are met, with a simultaneous risk of complete loss of invested money if those criteria are not met at all.

This ‘all or nothing’ principle behind binary options is what has given them their name; just as binary digits can only be in the form of 0s and 1s, binary options can offer either spectacular returns or practically nothing at all while trading.

As demonstrated by the large numbers of both new and experienced traders moving from conventional trading to binary options, the potential rewards are unlike any other form of investment. The provision of binary options with expiry times as low 60 seconds and offering profits of up to 85% of the investment, it is clear why they have created a storm since becoming available to home-based investors.

Against this background, you will find that major players in the binary options brokerage market have all got together to ensure that the ‘no return’ option is no longer as true as it used to be. Rather, even in the face of your invested money landing up ‘out of the money’, you will still have a certain payout coming your way. This is known as the insurance rate and can be up to a generous 15% of the initial investment for those binary options closing ‘out of the money’. Whilst this may not seem like a huge repayment on a losing position, with profits of up to 85% for winning positions, and over the longer term, this can be very significant indeed.

It is these fantastic returns, the element of thrill and excitement, as well as the intuitive ability to easily trade in stocks, currencies, indices and commodities from around the world that have got millions around the world enthused about binary options trading and there clearly seems to be no looking back. The popularity of binary options for many is simply based on the question of where is it possible to get a similar return on an investment?

An example of a Binary Option

The best way to understand binary options would be to cite an instance of such a trade.

Let’s say you invest in an Apple binary option for a price of $100, with an assertion that the stock will end lower than what they are currently trading at. If proven right, you will get 85% return while if proven wrong, you will get a fixed price insurance rate of $15.

So at the end of the day, if you are proven right whereby the stock does in fact end lower, you will get money to the tune of $185, while if you are proven wrong, you will only get only $15. In case your input had been $1000 instead of $100, you would get $1,850 back if proven right.

So as you can clearly see, returns on binary options can be truly spectacular if the odds end up being in your favor.

Differences between Binary and Regular Options

Binary options can also be understood very well by comparing them with regular options and noting the differences that exist between the two.

The table below will assist you on that front.

  Binary Options Regular or Vanilla Options
Payout Payout is pre-determined at the time of purchasing the option Payout will only be known as the investment unfolds and the change in asset valuation (if any) is recognized
Expiry Quick expiry, which can be as little as an hour, a day, a week, or a month Tend to expire longer say in a month or a quarter
Execution Cannot be executed till the expiry-time Can be executed with ease anytime till expiry-time

 

What about the Risk Factor?

Sure, when it comes to binary options, there is undoubtedly a great deal of risk involved while trading. At the same time, there is also the element of spectacular returns, to an extent which is rarely seen in the case of other trading avenues. Some argue that, whilst there are risks involved in all speculation, the possibility to gain such phenomenal returns allows traders with an edge, or solid trading system, to be highly profitable trading binary options.

Further, when we look at the element of risk per se in the case of binary options, and then compare that with the risk-involved in the case of other investment avenues, we find that there isn’t a substantial amount of difference. After all, even if you were to invest directly in terms of the regular options as mentioned in the table above, it is not like trading risk in that case would be mitigated completely. Rather, it would be of a certain nature, unlike that in the case of binary options, without the prospect of the very large returns that binary options can offer.

Are Binary Options a Scam?

No, binary options are NOT a scam. Somehow, from the time this entire industry came up, there has been no dearth of pessimists but truth is that it is 100% legit as well as very highly regulated. Of course, with risk and reward there will always be those who claim the market can be manipulated in favour of the brokers. However, the sheer simplicity of binary options would make this very difficult indeed.

Another group of pessimists claiming that binary options is a scam are those who may have lost money through their own reckless trading and without educating themselves in how to invest successfully. This group will always exist and reinforces the mantra of all financial speculation that risks must always be known and to only invest money that you can genuinely afford to lose.

Even if we take the case of binary options brokers, we find that they maintain a great deal of transparency in their operations and are accordingly in a very strong position to ensure the well being of their customers at all times.

Conclusion

Binary options trading are certainly not for the faint-hearted. But you can be assured that once you get a grip on things, you will never look back – and for very good measure! There’s also a chance for novice traders to open a free demo account and start trading without risking own money. This way you can make your first trades, try out strategies and markets and so on. Every trader should make use of it before starting to trade with real money.

Here are some good reads: Wikipedia and Forbes.com