Trading Binary Options — A breakdown
Trading is, to put it mildly, a complex topic. It’s not just buying and selling stocks. There are countless different markets, options, strategies, and assets you can use and bet on and just as many brokers who offer their helpful services. If you’re interested in trading binary options, you’re probably somewhat acquainted with the general stock market. Here are the basics you need to know when getting into binary option trading.
What Are Binary Options?
First things first: What are we even talking about when mentioning binary options? To fully understand binary options, we will have to ask several smaller questions like: What are options?, Are binary options fraudulent?, and What is Pocket Option?
What are options?
There are several styles of options, but in general an option, in financial terms, is a contract. It allows the owner (the holder) to buy or sell an asset at a specified price on or before a specified date. He is however, not obligated to follow through on buying or selling. You can buy options, be given options as compensation, or they are part of a more complex financial transaction. If we talk about binary options, we are speaking of an exotic option.
What are exotic options?
Exotic options are, as the name suggests, option transactions which are more complex than the so-called vanilla options. They are usually traded over the counter (OTC), meaning directly between two parties without the supervision of a stock exchange. They are options, that come with certain features or conditions that determine the payoff.
- A path-independent option determines its value on the underlying instrument only. If you own an option of Stock A, the value of Stock A on the date you sell it, or it expires, determines how much you gain or lose.
- A path-dependent option however can have several other factors determining the value. The Asian option is easily understood: How much money you make is not only dependent on the value of the underlying asset, but also the average value of the asset during a set time span.
What are binary options?
Binary options are a subclass of exotic options, in which you either get a set amount of payoff or nothing at all.
- The cash-or-nothing binary option pays you the predetermined value if the strike price on the date you agreed to sell the option is higher than the spot price on the day of acquiring the option, or in technical terms: when the option expires in-the money.
- Alternatively, the asset-or-nothing binary option pays the value of the underlying security in the same situation.
You, as the investor, bet on whether the determined condition will be met or not on the target day. If you believe it will, you will buy and keep the option till then. If you believe it will not, you will sell it instead. In the US, the price of a binary option is always under $100.
If you buy an option and decide not to sell it before the expiration date, because you believe the value will have increased by then, your option will be worth $100 when it expires and your prediction was correct. You will have gained the difference between the price you paid when you acquired the option and the $100 win. If you paid $30, you made $70 profit when the option expires in-the-money. If the value is lower, you will gain $0 and lost $30.
You can, however, decide to sell the option at any time before the expiration date, to reduce your loss or gain some profit, depending on the current bid/offer prices.
Is binary option trading fraudulent?
Many jurisdictions fear that binary option trading can be misused as a form of gambling and have banned it. At the same time, criminals have abused the binary trading system to scam people. The FBI and many other authorities are heavily investigating the binary trading market and especially its brokers.
While there have been cases of fake brokers, who take their customers’ money in false trading schemes, in and of itself, binary trading is a strategy of theoretical asset pricing and a valid trading form. You just have to choose the right broker.
What is Pocket Option?
If you are interested in binary trading, the most important thing is to find a trustworthy broker. To do that you will have to put in some research effort. Review sites help to find the right option. On top of that, it is important to only trade with regulated and licensed brokers. Pocket Option is one of these. They are regulated by the IFMRRC. When you read up on their services, you will see that their customers are happy with:
- the reliable customer support
- no hidden fees
- a fast & stable execution
- different payment methods
- over 100 different assets to choose from
- a bonus program
- a demo account
- high customization
- social trading