By Randall Liss Updated Sep 6, Binary options are contracts where an investor is speculating on one of two outcomes: a payoff or nothing at all.
The deciding factor is whether or not the option is in the money at the expiration date. You can trade binaries on events or on investments—such as stocks, futures, foreign currency, and exchange-traded funds ETFs. While the concept is relatively straightforward, there are many misconceptions about binary options, so it is important that traders understand exactly what they are—and are not—in order to use them effectively.
A binary is just a simple "yes or no" trade. Key Takeaways Binary options are a type of contract that allow investors to speculate on an outcome.
Binary options: Gambling or Trading?
If correct, the option holder receives a payout; if not, they receive nothing at all. People trade binaries on stocks, futures, foreign currency, and exchange-traded funds ETFs. Time frames for binary trades can be days, hours, minutes, and even seconds.
Unlike football, where the underdog receives the better odds, the binary has a multitude of strike prices —that have a variety of fixed odds—based on the current price of the underlying.
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Like any investment, there is always a tradeoff between risk and reward. In other words, it's a long shot. Buying and Selling Binary Options As you look at the various strike levels of a particular binary option, you might notice some similarities to call options.
The higher the strike price, the greater the chances that the contract will be bonuses and online earnings the money at expiration and, therefore, the higher the cost of the contract. Binaries can also be used as a hedgejust like standard put options.
Common Misconceptions About Binary Options
You go short the binary at the trade price. The big difference between binaries and standard put and call contracts is that the payout is either all or nothing.
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Exiting Before Expiration Binary options are not buy and hold contracts for long-term investors. The expiration date is the moment of truth; that is when the final value of the binary is calculated.
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After that, the option ceases to exist and the trade is over. However, at any point prior to the expiration, the binary position can be offset to cut trading losses or lock in a trading profit.
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If you are trading binary options on a regulated exchange, you will be provided accurate and up--to-date time and sales data on all bidsoffers, and trades throughout the trading session. That's because the exchange, which is simply matching buyers and sellers on every trade, provides this information in real-time.
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Binary trades can last days, hours, the biggest bet on binary options, or even seconds, which ups the odds for short-term profits or losses. Since you are never trading on marginyour account always needs to have sufficient funds to cover the initial cost of the trade plus trading fees.
With binary options, the maximum risk and the potential profit are clearly defined by the terms of the trade. The Bottom Line There are many misconceptions about binary options. While some people use them as a form of gambling, these contracts can be used in other ways as well, such as hedging. The costs of a contract will vary depending on where the market price is relative to the strike price.
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When buying a binary, the goal is for the asset to close above the strike price. If so, the investor gets the payout.
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If not, they get nothing and lose their initial investment. Compare Accounts.
Binary Options Charts If you follow trends, work with information and follow the money, you are more or less prepared and know what to expect. At any given moment you need to know what to do, whether to trade or not and even what to trade because in some cases one trade would be more beneficial than another.