Binary Options, also called as Digital Options or Fixed Return Options (FROs) are a highly lucrative form of investment.
When trading Binary Options, you need to anticipate the direction of the price movement of an underlying asset, as opposed to actually buying or selling the asset – making it simpler, easier and potentially more profitable than traditional trading.
There are only two possible outcomes: the price of the underlying asset at its expiry time is either higher or lower than its original price, therefore considered as “binary”. As long as the outcome is “In the Money”, you collect a profit, which is predetermined according to the risk and initial amount of investment, and inconsiderate of the price of the underlying asset itself.
For example, a call option worth $200 is bought at 1PM, speculating that the price of crude oil will rise. If at 3PM the price reaches the Strike Price, you will collect profits. On the other hand, if your speculation goes wayward at the set expiry time, you lose your initial investment.
Why are Binary Options so Popular?
There are many reasons why online traders find Binary Options so attractive. Here are some of the main ones:
Traditional options typically require taking into consideration multiple factors in order to determine an asset’s exact value (e.g. its potential earning power, volatility, PE ratio, dividend percentage, etc.). With Binary Options, on the other hand, the only wager is whether the direction of the asset’s price will go up or down. Ultimately, a yes/no question. This significantly simplifies the trading process, and enables both the novice and the professional investors to trade easily and unworriedly, hence wisely.
Unlike traditional options which have limited expiry time and maturity dates (typically once a day/week/month), Binary Options, in contrast, have a nearly innumerable range of expiry times, anywhere from a few seconds to 1 month. This gives the investor greater trading possibilities and the freedom to enter an investment amount at his/her own convenience.
Fixed Risk/Reward Ratios.
In binary options trading, the payouts are predetermined, as there are only two possible outcomes. Both the risk and reward rates are defined beforehand, regardless of the specific behavior and value of the underlying asset. This is a big advantage compared to the risky nature and indefinite reward possibilities of traditional options.
A Magnitude of Assets.
Using Binary Options, an investor has the possibility to choose from a range of underlying assets, including commodities (e.g. gold), currency pairs (USD/JPY), indices (e.g. S&P 500) or stocks (e.g. Microsoft Corporation) and speculate about the price changes.
Very low investment amount is needed to begin trading with Binary Options. Usually, you require only $250 to open a binary options trading account. However, with a forex brokerage firm, you will require a large sum of money to start a trading career.
How to trade binary options?
To begin trading Binary Options is really simple and intuitive. It does not require extensive knowledge of the way financial markets and underlying assets behave. All you need to do is successfully anticipate the direction of an underlying asset’s price.
Once you have found an asset you would like to trade with, choose an expiry time from the provided list of options (bear in mind that the shorter the expiry time, the lower the risk. Conversely, the longer the expiry time, the higher the reward).
Select your investment amount, then accordingly, pick a Call option if you think your chosen asset will reach above the Strike Price or a Put option if you think it will expire below the Strike Price.
Notice that the trade has a defined risk/reward ratio, which means the potential Return on Investment (ROI) for a correct prediction will appear immediately on your screen. If the Option expires “In the Money”, the ROI will automatically be deposited into your trading account.
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