Introduction to Binary Options
Binary options are high return, short-term investments. Based on exotic
options, which are only traded on private markets, binary options are
traded over the counter and are available 24 hours a day, 7 days a week. A
binary option, also known as a digital option or an all-or-nothing, is a
trading instrument with a fixed return that is determined at the outset
of the trade.
A trader will receive a predetermined payout if
the binary option expires in-the-money. He will lose a predetermined
amount of his original stake if the option expires out-of-the-money. All
markets - currencies, stocks, commodities, and market indices - can be
underlying assets for binary options. The degree to which the option
closes in or out-of-the-money does not matter as it does with a
traditional option.
The beauty of trading binary options is the
inherent simplicity. If a prediction is correct, the trader receives a
refund of the stake plus a return on investment that is typically
71-88%. If the trader is wrong, the broker will return a small
percentage of the original stake. Unlike traditional options,
binary options do not have set prices: the trader decides upon the
amount of money he wants to risk and invests that amount when he buys
the option.
Furthermore, the shorter duration of these contracts
makes binary options more suitable for short-term trading than their
traditional counterparts. In the past few years, online binary
option trading has grown exponentially. Digital trades can utilize many
more underlying assets, and have much more flexibility in their timing,
strike prices, and contract options.
Since 2009, they have
become very popular among traders as a way to control risk in options
trading, in turn allowing for more dynamic strategies to be developed. Finally,
constantly evolving technology better facilitates digital trading and
allows investors to make more lucrative trades. The beauty of trading
binary options is the inherent simplicity.
Binary Options are
enormously popular in Europe and are extensively traded in major
European exchanges, like EUREX. In the United States, there are a few
places where Binary Options can be traded. The Chicago Board of Trade
(CBOT) offers Binary Options trading on the Target Fed Funds Rate. To
trade these contracts, traders must be members of the exchange or
investors are required to trade through such members to execute a trade -
the value of each contract is $1000.Nadex: a U.S.-based, U.S.-regulated
Binary Options exchange. Nadex offers a range of expiration
opportunities (daily, hourly, weekly) that allow traders to take a view
on market developments. The choice is vast. Indeed, there are over 2,400
Binary Options contracts each day. These range from popular currency
pairs such as GBP/USD to key commodities such as gold and oil. All
member funds are held in a segregated U.S. bank account, in accordance
with CFTC regulation, adding an extra layer of security. 
Binary Options brokers do not charge any per-trade fees, nor do they
collect any commissions. What percentage of the time would you have to
be correct to profit from the binary option you are contemplating? How
different are the terms (for instance, "strike price") for one side of
the trade you are contemplating and the other side (or, more precisely,
its reverse)? If they are far apart, one would have to successfully
predict that the underlying assets would move far from what the
option-sellers predict--generally something between the terms offered
for different sides of a transaction--which would be unusual to occur.
It is extremely rare and difficult to out-perform the market
consistently, so high transaction costs can easily hurt or eliminate
returns.
