I couldn’t wrap my head around binary options for some time, but now I get it… I think. Here’s a plain English explanation if you’re as puzzled.
A bit of Investopedia: Options are a derivative* instrument creating rights in specified assets – in this case, the right to buy an underlying asset on agreed terms at the point of maturity. If the market moves in the trader’s direction, they may choose to exercise the option. If the market moves in the opposite direction, the trader will want to cut their losses and allow the options to lapse. (Right. Regular options. You know all that.)
Options can be described as cash-or-nothing, or asset-or-nothing. In practice, options tend to be settled for cash rather than for the assets involved, but both alternatives are viable. Sites like www.bonusbinaryoptions.net can help inform you of the best ways to trade your binary options.
When a trader buys an option, it gives him/her a right to buy the asset at a defined price. With regular options, where the asset price grows beyond the option price, the difference becomes the trader’s profit.
In binary options, the price of these instruments is relevant only to determining a win or loss outcome. In plain terms, a position that moves 1 point in your favor is as helpful as a 100 point-move in your favor. With binary options, both would return at the same rate, and in this sense binary options favor shallower market movements.
This has a corresponding downside: even with a small move, a lost binaries trade is a lost trade. But some brokers offer a safety percentage, designed to provide a degree of relief against the severity of a losing trade. This makes binary options slightly less volatile, but strangles potential profitability. In this respect, the safety net is a trade-off between high rewards and improved security.
When a binary trade is successful, the trader is paid a percentage gain on their original stake, over and above the capital invested in the position. With the potential for quick maturity times on the trade, binary options leave open the possibility of quick, substantial profits on otherwise small trades. While it is not without its risks, this simplistic structure makes binary options a particularly attractive choice.
Binary options can be traded online and on a small scale, by virtually anyone eligible for an account. While binary options are not an easy trade, they cut out much of the complexity and noise of financial trading. Time can be our worst enemy, because of all the second-guessing involved. By entering binary trades which are much shorter, you don’t give your psychology a chance to mess up the trade. On that note, I’ll be posting an excerpt from Wyckoff’s book next (see my original post about the book here).