Introduction to Binary Options
Binary options currently represent one of the quickest growing sectors in the finance industry. Although binary options have been available in the professional currency option trading market for well over a decade, part of this growth stems from the fact that commodity, stock and forex binary options have become increasingly available to and popular among retail traders in the last few years.
As a result of this growing retail demand, many binary options broker websites currently offer a quick and readily accessible way of obtaining up to date pricing on a range of stock, commodity and forex binary options in relatively small dealing amounts that are accessible to retail traders.
Furthermore, using these online option brokerage facilities to trade binary options can significantly broaden the risk taking methods available to those individuals actively engaged in stock, commodity and currency option trading.
How Binary Options Work
Basically, binary options require a trader to pay an upfront cost or premium for the potential ability to earn a predetermined amount or payout if the binary option ends up in the money when the underlying financial market is observed at the option’s maturity date and time that is commonly known as the option’s expiration.
The phrase “in the money” or ITM simply means that the rate or strike price of the binary option is more favorable than the prevailing market in the option’s underlying instrument at the time of the option’s expiration.
The alternative phrase is “out of the money” or OTM, and this refers to the situation where the binary option’s strike price is less favorable than the market at expiration,
Similarity to Betting
These relatively simple premium and payout characteristics of binary options make them similar to placing a bet on an underlying financial market with a predetermined set of outcomes.
In essence, the premium paid for a binary option represents the amount of the wager or stake that the trader gambled on their bet, while the binary option’s payout represents the winnings to be gained if the trader’s bet is ultimately successful.
This notable similarity of employing a binary option trading strategy to more traditional betting can assist novice option traders who are also gamblers in becoming more comfortable as they endeavor to learn option trading and how to employ derivatives in their trading strategies as a potential form of portfolio diversification.
Basic Components of a Binary Option Trading Strategy
The first decision to make when considering trading binary options is what underlying asset or financial market you wish to place a bet on. These assets might include forex rates, as well as commodity, stock or stock index prices.
The second decision will be to determine the amount of time until expiration of the binary option you wish to purchase.
The last decision will be the forecasted direction of the binary option based on your prediction for the underlying market’s movement during the time frame until the option’s expiration. Basically, if you think the market will rise, you will want to purchase a call, but if you think the market will fall, you will want to purchase a put.
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