Binary Trading and Binary Options
Binary trading or binary bets as they are commonly referred to are an emerging market that unlike forex is quite easy to understand, and would be well suited for beginners to the trading world. With binary trading, the trade can effectively bet (for instance) on the price of oil going up or down in a given time period. Or, they could bet on an individual stock going up or down in a given time period. Binary trading present a unique opportunity to trade that offers consumers an advantage by researching and leveraging information and opportunities.
Many spreadbetting platforms and independent brokers now offer the opportunity to trade binary options across several different underlying assets including forex, commodities and individual shares. These can be an attractive trading tool for those who have a reasonable grasp of high-probability market movements and often useful for those situations where it may be difficult to define an exit for a trade that you are almost certain will be profitable.
Binary options are also know as either digital or all-or-nothing options. They operate by allowing participants to place a basic bet on whether the market will close above or below the current ‘strike price’ at a predetermined expiry time. Profits can be anywhere between 60-400% depending on the underlying asset and the expiry time of the trade. Spreadbetters should really ignore the associations with the word ‘option’ being linked to high risk, high value contracts traded over a monthly timeframe. In fact, binary options risk and reward is already predetermined before you have even placed the bet. This risk reward ratio is reflected as a percentage of your stake and can vary depending on the broker and the underlying asset that you are trading.
Many specialist binary option brokers will be able to offer very short expiry times for your bets. This can be very attractive for intraday traders whereas large spreadbetting brokers such as IG Index will have a fixed expiry time for forex markets at 8pm each day. Depending on your individual trading style, the expiry time can be applied from as little as 1 minute (this is provided by Traderush.com) to a 1 month expiry time. Although these expiry times are often fixed for the duration of the trade, some specialist binary options brokers also offer a tool to close a position before the expiry time has elapsed or to roll-over a position to the next expiry time (such as optionbit.com). This allows options to be closed early when they are in profit or for the life of the trade to be extended in the hope that it will move favourable with you in the future.
‘Had another go this morning with the 5-minute FTSE binaries. Using upbets from under 10 and downbets from over 90 with no regard for charts or any other indicators. Eleven trades. Nine losses at under 10pts each. Two wins at over 90pts each. Net gain 124.5pts. Playing those short term binaries (5 minute sessions but only the middle 4 minutes accessible to trade) doesn’t involve any clever awareness of market mood. It’s more to do with capitalising on the minor random twitchinesses that most traders would normally ignore or want ironed out, and deliberately ignoring almost everything else ;o) But with a few rules that differentiate it from mere coin-tossing…’
The returns that you can make will be determined before you place the bet as is the level of risk that you are exposed to. These are fixed values and make binary trading one of the most transparent forms of trading. There will be no nasty shocks from slippage or liquidity issues and you will never become trapped in a negative position. As the name suggests, it is an all or nothing bet; either the option expires in the money or out of the money. The only neutral scenario will arise when the value of the underlying asset closes at precisely the same level as the strike price on opening. This will result in you receiving your initial investment back in full.
An example of a binary option is a 70% return on a £100 stake on gold closing above the strike price in one hour’s time. If gold did close above the strike price then the winnings would be £170 on the initial investment. If, however, it closed out of the money you would likely only receive 10-15% of your original stake (known as the protection rate) so in this case it would result in a loss of £85-90.