Binary options contracts offer fixed risk and clear outcomes, making them a great entry point for new traders. They can also form a key part of a trading strategy for experienced traders.
Remember that profit is not guaranteed – there is risk involved in trading any asset. Diversification, regular monitoring and avoiding overtrading can help to minimise risk.
What is a binary option?
A binary option is an all-or-nothing investment that pays a fixed monetary amount or nothing at expiration based on whether the trader correctly predicts a market’s direction. The payout for a winning trade can be up to 100% of the initial investment.
The most basic type of binary options are called Up/Down (also known as High/Low). Traders predict if a market’s price will be above or below the strike price at expiry. If the price is above the strike at expiry you win. If it is below you lose.
Binary trading is a zero-sum game; for every winner there’s a loser. Traders select their position’s strike price based on both probability and their comfort level with the level of risk they’re taking on the trade.
Before you trade, make sure the firm you’re dealing with is registered as an exchange at the Securities and Exchange Commission’s EDGAR Company Filing website and that it is a Designated Contract Market at the CFTC’s website.
What is a call option?
A binary option is an all-or-nothing investment in which you win a fixed amount or lose your entire investment based on a yes/no outcome at expiration. This makes it easy to understand your potential profits and losses, even if the underlying market only moves by a fraction of a cent.
Each trade has three key elements: the strike price, the expiration date and the time to expire (also known as the maturity). If you think the underlying market will be above the strike price at the end of the contract’s term, buy the contract; if you think it will be below the strike price, sell it.
It’s important to choose a broker that is registered with the CFTC and is a designated contract market, as this will help protect you against unscrupulous market practices. You can check whether a broker is registered by using the Security Exchange Commission’s EDGAR system or National Futures Association’s Background Affiliation Status Information Center.
What is a put option?
A put option is purchased when a trader predicts that the price will drop. This is used to limit risk by buying protection on underlying assets and can be part of an options spread.
The most important factor when trading is to choose a broker that suits you and your style of trading. Some brokers are higher-risk takers, while others have a more conservative approach to risk. You should research and find the right one for you before investing any money.
Binary options offer a clear profit/loss outcome, so you know exactly what you stand to gain or lose before executing a trade. The maximum profit or loss cannot exceed $100 for a single contract and this helps to protect traders from large losses. It also makes it easier to manage the amount of capital you’re risking on each trade. This is a key benefit that binary options offer over other markets, such as forex and oil.
How do I trade binary options?
Binary options offer a structured way to trade with limited risk and clear outcomes. Each trade is based on a simple yes or no question: will this market be above a price at expiration? If you think it will, buy the option; if you don’t, sell.
You choose the underlying market (for example, forex, stock indexes, commodities, or economic events). Then you select a strike price and an expiration date. If you predict correctly, at expiration you either make a predefined profit or lose the amount you paid to open the trade. You can also close a trade early if you want to limit your losses or lock in profits.
A single binary options contract doesn’t cost more than $100, so your risk is limited. Trading is fast and intuitive, with no commissions or spreads. Try it risk free with a Nadex demo account. Learn more about the top regulated brokers here.