What Are Binary Options?
Binary options are simple fixed reward contracts.. A trader receives either a fixed profit or fixed loss. Binary options offer the traders a simple “One or the other choice”. They are designed to be very simple to trade.
Binary options have two possible outcomes, e.g “Up or Down”. The fact that there are only two outcomes possible is why they are called “binary”. Binary trading is extremely hot right now due to how easy it is for anyone to do it. Binaries are the future of online trading.
The most simple binary trade is an up or down binary option.
Do you think the price of something (gold for example) is going to be higher or lower in 1 hour? If you think higher you “call” and if you think lower you “put”. You either win your trade and get your return (up to 90% in some trades) or lose the amount risked up front. One hour later your binary trade reaches the expiration time. At this time you are either in the money or out of the money.
It is that simple – Binary Options Trading is designed to be easy to trade for everyone!
Example – Trading Google Stock With an Up / Down Binary
Let’s look at an example of a simple cash-or-nothing binary trade so you can understand how they work. Let’s say you want to trade Googles stock price.
You believe that Googles stock is going up, and that it will be trading at or above $670.39 as of a 4:00pm EST today.
You decide to make a trade based on that belief. Since you think the price is going up, you place a ‘Call’ binary trade. You risk a $200 on this trade. This the total amount of money you are risking. You can not lose more than $200. The best part about binary options is that your risk and return are fixed and known up front. You can never lose more money than your trade amount. Your return is known up front so you know exactly how much money you will make if you win.
In this example, your payoff is an 70% return if we finish in the money. There is a 10% return, or rebate, if we lose. We are going to risk $200. 70% of $200 = $140.
If we win, our payout is $340.
We get our $200 back plus $140 more for a total payout of $340. Most binary brokers usually offer between 70-90% payouts, at least the good binary trading sites trusted by traders today offer these kind of returns.
If we lose, our payout is $20.
We get a 10% rebate on our risked amount. 10% of $200 = $20 ‘out of the money return’.
So, to recap. If you win you get your fixed return of $340. IF you lose you lose your initial trade amount of $200, but get a 10% rebate of $20. Making it a net loss of $180.
The price you are betting Googles stock will close above, $670.39, is called the ‘Strike Price’. The date and time you chose as part of your trade are called the expiration date or maturity date.
If the price finishes above $670.39 you win the trade. If it finishes below $670.39 you lose the trade. In the money or out of the money. The trade is done and your payout is made to your account virtually instantly.
That is it. It is that simple.
It does not matter how much Google closed above $670.39 It just matters that it closed above that price. Your payout is the same regardless of how far an underlying assets price moves. That is one reason so many people absolutely love trading binaries. You just pick from a one or the other choice and hold on for the ride.
This example is the most common type of binary option traded today. It is an up/down option and known in the industry as a cash or nothing trade. You make the cash or you get nothing.
There are more types or styles of binary trades available. They all offer a one or the other choice and a fixed risk/return. Let’s take a look.
Binary Options – Types & Classifications
On this section, we’ll describe the most common binary option trades. You’ll learn how traders are using them to carve out profits of up to 80 percent or more (sometimes, much more). Along the way, it helps to keep in mind that “binary” means “one or the other.” This concept is applied consistently in the various types of binary options you’ll encounter. Lastly, we’ll provide a short list of reputable binary options brokers that offer access to the instrument types you’ll learn about below.
There are a number of different classifications of binary options trades. All of these trades have that basic definition in common, but differ based on a number of elements including the type of payout and the conditions of the trade. These days the newest trend and online trading is binary options. Many companies online promise you can make a lot of money trading binary options, but what are they?
Binary options are trades you can make which have a fixed risk and reward. You can also look at them as another way of trading an underlying financial instrument, since you can trade stocks, currencies, commodities, and other assets as binary options.
The term “binary options” refers to the way you’re trading the underlying asset.
Let’s take a closer look at Binary Options Types.
- Calls vs Puts – Refers to whether you choose Up or Down – the most common type.
- Touch or No Touch – Refers to whether you think the price will touch or not touch a certain point
- Double Touch / Double No Touch – Like the other but has two points to contend with
- Range Options – Boundary Trading or Tunnel Betting – Refers to whether you think the price will finish in or out of a price range
Although binary trading has exploded in popularity over the past couple of years, many active options traders are unfamiliar with them. This exciting, new area of trading is winning converts each day. Traders know in advance how much they stand to lose, and how large a return they’ll see if their options expire in the money. In addition, they have several types of binary options at their fingertips, giving them a variety of ways to implement their trading strategy.
Call vs Put – High/Low Binary Options – Up Or Down
These are likely the most popular of all binary options as they are the easiest to understand, and therefore trade. Call and put options are commonly grouped under the category of ‘cash or nothing’ binary options simply because at the end of the set time period, the investor will either receive a cash payout or nothing.
Calls Vs. Puts – Up Or Down
Call options are also known as digital options and are a relatively simple form of binary option. A buyer will choose to purchase a binary call option when he or she believes that the asset price will rise over a period of time. In order for a call option to be successful, the asset price must rise above the price that the asset was at when the buyer placed their bid. This is known as the strike price.
A put option is the exact opposite. Instead the buyer is predicting that the asset price will drop below the strike price at the time when the option expires. If this occurs, the buyer receives the full cash payout offered by the option.
These instruments are referred to by a few names, including up/down, call/put, and of course, high/low binary options. Most consider them to be the simplest of all binary options types. They are essentially a bet on whether an asset’s price is going to move up or down. You’ll find this type of instrument at nearly every top binary options broker.
For clarity, a call is simply a contract in which one party agrees to sell its ownership stake in an asset at a certain price to another party. If the price of the asset increases, the second party (i.e. the buyer of the contract) profits. A put is a similar type of contract. The difference is that the buyer of the contract profits if the price of the asset falls.
Boundary Or Range Options
These instruments involve price ranges, or boundaries. If you correctly guess whether the price of the underlying asset will fall within a particular range, or float outside of it, you’ll receive the posted return on your investment. If you guess incorrectly, you’ll lose your investment (excluding a rebate, if the broker offers one).
Known as tunnel bets and boundary betting, range options work by choosing whether a price expires within a particular price range. I think the range options have the most types of synonyms. They are also known as in and out options because you are either betting in the range or outside of the range.
Range options are less common than high/low binary options. They present a higher risk of loss, but also offer a higher return. It’s not uncommon for potential returns on boundary options to climb to 300% and above.
Touch/No Touch Binary Options
With these instruments, profit and loss are determined by your ability to guess whether an asset’s price will reach, or “touch,” a specific price. If the price touches the target price, and you guessed it would do so, the trade closes and you receive your expected return. Otherwise, the trade remains open until it expires out of the money.
Touch or No Touch Options
This style of binary option is simple and popular. They work by having a certain trigger price point. If you believe the assets price will hit that price point in a certain time frame you have to bet on the touch. If the price touches that trigger then the trader wins and the trade is over. If the trader bets against the price touching a certain point then the opposite is true.
If you choose a “no touch” trade, and the asset’s price touches the barrier, the trade closes immediately at a loss. If you had chosen ‘touch’ trade and the price barrier was hit it would result in a win immediately.
Double Touch / Double No Touch Options
These binary options work on the premise as touch/no touch instruments. The difference is that two price barriers are used rather than only one. The two prices form high and low points between which the asset’s price fluctuates. Profit and loss are determined by your ability to guess whether the price will “touch” either barrier.
If you select a “double touch” trade, you’ll receive a payout if the asset reaches or breaches either target price. If you select a “no double touch” option, you’ll receive a payout if the price remains between the barrier, touching neither of them.
Classification via Payout Type
There are two different types of binary options trades as classified according to the payout. Cash or nothing is a trade in which the participant either receives a fixed amount of cash for winning or nothing for losing. Keep in mind that “receives nothing” doesn’t fully describe the consequences of a loss. The trader generally forfeits the entire risked amount, however some brokers have rebates on losses.
Asset or nothing is just like the cash or nothing type, except that the trade pays out the value of the underlying financial instrument instead of cash. These types of binary options are not as prevalent as the very popular cash or nothing style of options.
Another way of classifying trades is to refer to American-style or European-style trades. In American-style trades, the options can be exercised as soon as the underlying asset hits the strike price—meaning you don’t have to wait through the entire expiration or maturity period. With European-style trades, you don’t win anything if the asset doesn’t hit the strike price (or trade above or below it as you wagered) at the expiration time. That means if the strike price is hit before the maturity date is reached and then the trade goes back against you, you lose. In other words, this type of trade is more specific where timing is concerned.
Many people classify binary options by the type of trade that is happening.
Cash Or Nothing Binary Options
There are two types of instruments: those that pay cash and those that pay in the form of the underlying asset (assuming the trade expires in the money). The instruments you’ll find at the binary options brokers we recommend represent the former, called cash or nothing binary options.
Cash Or Nothing Options
Cash or nothing binary options refer to the fact that you either finish the trade in the money our out of the money. You either won money or lost your money. The real cash or nothing binary options are set up this exact way, with a fixed return if you win and a loss of your trade amount risked if you lose. A few limited brokers offer rebates on losses (AnyOption offers 15% rebates) so the cash or nothing name is not 100% accurate.
This means you’ll receive a percentage of your investment if you correctly guess the movement of the instrument’s underlying asset, or its price when the instrument expires. If you guess incorrectly, you’ll lose your investment.
Most binary options types are based on this “cash or nothing” premise. The percentage return the trader receives if the instrument expires in the money is posted by the trade. It is known before the trade is executed. This a major advantage over other types of trading where the amount of potential profit or loss is unknown.
Cash Or Nothing With Rebates
This is a variation of the conventional cash or nothing instrument. A lot of binary options brokers offer rebates to traders whose options expire out of the money. In most cases, the rebates range between 5% and 15% of the amount invested. For example, if you invest $100 in a trade that expires out of the money, and the broker offers a 15% rebate, you would only lose $85. Not all brokers offer rebates. Those that do not offer them usually extend other perks, such as higher returns for trades that expire in the money.
Cash Or Nothing With Buy-Out Clause
Some binary options brokers offer a feature that allows you to close your trade within minutes of executing it. This is a handy option if you suspect you guessed incorrectly regarding the price movement of the option’s underlying asset. By exiting the trade early, you are able to limit your losses.
You can also use this feature to lock in early profits on a trade. Suppose you guess correctly about the asset’s price movement, but suspect it may head in the opposite direction prior to the instrument’s expiration. Closing the trade early helps you to realize early profits, and avoid forfeiting them if the asset turns.
Examples of this buy-out clause include 24Option.com’s “Early Closure” feature and AnyOption.com’s “Take Profit” feature.
Asset or Nothing Binary Options
If you traded an asset or nothing binary option on the stock, instead of receiving the amount of cash you wagered, you’d instead receive that same value in stock in the company. There are many different variations on binary options trades—you may bet that a certain price won’t be touched, for example. You can even specify multiple prices you believe will or will not be reached in a given time period. The rules which govern binary options trades vary depending on where you’re trading. The different rules concerning expiration dates are referred to as European- or American-style trading.
Ready To Start Your First Binary Options Trade?
Now you know the basics you’re ready to start learning more with our binary trading guide! You’re not ready to start trading yet. To trade profitably, you’re going to need to come up with a reliable, consistent methods for winning your binary options trades. That means there is still plenty of research, testing and demo account trading. If you can come up with a consistently profitable method and put it into practice, you could potentially trade binary options for a living.
Top Binary Options Brokers With Different Options Types
The types of binary options offered by various brokers may have little influence on which brokers you ultimately work with. A lot depends on whether you intend to execute the instrument types described on this page. A majority of traders stick closely to high/low binary options, all but ignoring other types of trades. Some, however, are willing to execute high-yield instruments, such as boundary binary options. Below, we’ll tell you which brokers offer which instruments, along with other features and perks.
If you’re new to trading binary options, we encourage you to learn the ropes with up/down instruments before venturing into higher-yield options. You’ll find them at each of the four sites we recommend above.