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All you need to know about Binary Options

What Are Binary Options?

Binary options are exotic options which were typically available on OTC markets. But now, thanks to the information age, even a day trader or a private investor can trade these products. Before you go ahead and read this blog, a word of caution regarding the trading of these binary options. The Binary Options are not legal in India, but they are extensively traded in the UK, and are largely seen as something close to gambling by the rest of the trading fraternity. Binary options are not regulated by any exchange or government and carry a lot of risks.

Now coming back to the actual trading part, as the name suggests it is binary in nature, that is, binary options always provide two choices to the trader and pose a singular unique question. The question posed by each of them is different, and if you understand what that is then you will be able to trade it easily.

If you can answer the question with a certain degree of confidence, then you have the eligibility to trade these exotics. Like the normal put and call options are known as vanilla, as in ice cream flavors, we have many exotic flavors available in options too. I have listed a few that are supported by trading platforms currently.

Types of Binary Options

High/Low Binary Option

This is a very simple binary option. All you need to do is predict if the market will go higher or lower by the time of expiry. And the time of expiry is usually your choice, that is, you can choose the expiry from a range of 30 seconds to a few days. I will explain this in detail with an example.

High and Low Binary Option

The above pic is taken from IQ option demo platform. Here you can see that the candle expires every minute (on the X-axis) and I bought a put worth $1 at the price denoted by the red horizontal line, and as you can see the candle closed at the white horizontal line, which is higher than my strike, resulting in a loss of the $1 that I had invested. Had my prediction been correct I would have received an X% as profit along with my initial investment of $1. This percentage profit is usually fixed and known before the trade is executed, this feature of knowing your risk enables you to balance your strategy allocation by adjusting your risk and reward in advance.

This is also the reason why people tend to apply Martingale or Inverse Martingale to their bets, to manage the risk. As it turns out, usage of Martingale is exactly the reason why Binary Options are considered as more of gambling than trading.

One Touch/No Touch

The question that you will need to answer before trading a One Touch option is:

“Will the stock trade the price X, before expiry?”

The No Touch option is an exact negation of this statement- “Will the stock not trade this price?”

Similar to what we have seen earlier in High/Low option, at the time of entering the trade you know the time to expiry and the return that you will be getting if your prediction is correct. The difference in returns between One Touch and High/Low is significant. The average return for a High/Low option is of the order 50% – 100%. But a One Touch option will have an average return of the order of 400%. Usually, the magnitude of the payout of a Touch option would depend on how far the strike price is from the current market level. The closer the point, the easier it is for the market to reach and hence will carry a lesser return, and for a no touch option the exact opposite is true for its return.

Range/ Boundary

As the name suggests, by buying this option you will be betting that the option would trade in a particular range. Like in the previous option types, the expected return would depend on how close the range is to the current market trading price. This option can be understood as a combination of two No Touch trades, that is, you expect the market to not trade one price above the current market level and one below. This is obviously a strategy that works best in low volatile conditions. When the directional prediction of the market which is needed in the previous two strategies becomes difficult then you can use this range option to play safe and make money. But unfortunately, only a few brokers, if any, offer this kind of flexibility.

There are many other complex binary options traded in the market. But there are very few that can be traded online. The above mentioned binary options are mostly available on many trading platforms. Let us look at a few of them.

Binary Options Trading Platforms

IQ Option

IQ Option

This is the user interface that would see once you register for the demo account. You also get $10,000 practice money in your demo account for paper trading. As you can see, there is no option for other options. This is one of the drawbacks of this otherwise very good binary options broker. You can only trade High/Low options and they don’t have the facility to trade Boundary or Touch options. I hope they will come up with those as well. Speaking about IQ Option, it started in 2012, offers a free demo account to help you get started, and the minimum deposit is just $10 for the Real Account, which is really cool.

Binary

This is a very popular site and provides many types of binary options. Just look at the screenshot below and you can see.

binary options website

Like IQ Option you do have a demo account or paper trading money available with this broker. You can try the virtual account to do a test run before you actually trade all these different types of Binary Options. There is another significant advantage to the options traded with this broker- You can set the trading time (entry time) aside from the expiry date. Even here, the minimum deposit is $10 and for e-wallets it is $5. There’s a 1.5% payout commission when you withdraw your money.


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