What is a binary option?

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Binary options (also known as digital options or exotic options) is a relatively new gaming method in the financial market. It became available worldwide in 2008, before that investors could only use it through licensed brokers.

As far as the name itself is concerned, we all remember that binary means a system that has 2 as a base. Binary options are all about choosing one option out of two.

How to earn money with binary options?

Just predict in which direction the price of a certain asset is going (in case of the classic high/low option, we estimate whether the diagram is going up or down) or if the price is going over the estimated level in a given period of time (e.g. one­-touch options). Due to their extremely dynamic evolution, there are also different types of options. An asset means, for example, a currency pair, a share price, indices or commodities (e.g. petroleum, gold or cotton). A detailed description of the markets can be found here.

Example:

We estimate whether the currency pair EUR/USD will be higher (call option) or lower (put option) than X (opening price) within 60 minutes. If we do not make a mistake, we earn ~70­-90% of the investment (each broker sets a different minimum and a different level of return for a given option). If we make a mistake, we lose the entire investment. Some brokers also offer up to 15% refund or a risk­-free first option (no loss in case of not winning).

As we see, to earn using binary options it is necessary to win more often than lose in the long­-term since 51% success rate is not enough. A success rate of, more or less, 60% is necessary to start considering winning.

To describe methods of binary option gaming, it could be said that binary options are a mixture of the Forex market (but they are not limited to currency exchange) and bookmaking since we estimate whether, for instance, a currency pair will go up or down within 15 minutes. If we “bet” correctly – we win, if not – we lose the entire investment. Similarly to betting on soccer, we can estimate whether there will be more than 3 goals in a match. It is not gambling in its purest form since the movements of assets’ prices can be predicted – just like we can predict the Forex market using technical or fundamental analysis. What we do not do is purchase any currencies, we only estimate the movements of assets’ prices in a chart.

While it is easy to use it does not mean it is easy to earn money. If predicting those movements was easy, everybody would be earning money this way. According to the statistics, however, most people actually lose their money. We need to abide by rules similar to those in other types of investments, e.g. the Forex market. An investor should be cool, calm and collected, so that he or she is not tempted with a quick return, but remembers that it may mean a quick and considerable loss. Therefore, it is crucial to be prepared – use our Education section, read other investors’ experiences, consider those first missed transactions an educational tool and make use of demo accounts. A list of brokers who offer demo accounts can be found here.

As it was said before, options tend to continuously and dynamically change, which means that there are many mutations and variants of binary options (e.g. short­-term, boundary options, ladder, pair options). What’s more, we can expect a further evolution of options.

Binary options are an interesting alternative for those who believe Forex to be too complicated or too time­-consuming. Binary options entail a considerable speculation, so we have low levels of confidence and only assumptions which can be further supported by market analysis. On the other hand, we cannot constantly monitor our positions or use tools known from the Forex market, such as stop-­loss. There is no financial leverage and once the option is purchased we know exactly how much we can lose. Contrary to the rules of Forex, we do not need to pay any fees for the options chosen. An additional advantage is the possibility of high returns despite the stagnating market and the opening price (not to be confused with deposit amount) is rather low (starting at roughly $10).

When we also take into consideration bonuses offered by brokers, binary options become an interesting form of investment, especially for those who appreciate the simplicity of rules and clarity of functions and operations. The upsurge in popularity of binary options seems to confirm just that.

In binary options we are also in control of creating an investment, which means that we can decide how much we are willing to invest, we can choose the type of option or asset and the expiry date. It is especially true of brokers who offer the option creator. The expiry time directly influences the final profit. The general rule is that the longer an option lasts, the lower the profit, but sometimes the opposite is true. Therefore, brokers encourage users to choose more risky short-­term ones. Thanks to the variety of options, we can choose a configuration that optimally matches our expectations as well as the risk we are willing to take.

 

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