Binary Options Pros and Cons

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  • Binarium
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  • Binomo
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Binary Options – Pros & Cons

The Good & Bad Of Binaries

Trying to decide whether to trade binary options, try out spread betting, or do a more traditional type of trading in stocks, currencies, commodities, or indices? Ultimately the best type of trading is the type that fits your trading personality, but here are some binary options pros and cons to help you make your choice.

Binary Options Pros – Advantages Of Trading Options:

  • Small Budget Can Still Trade – You can trade without a big bankroll. This is unlike many stock brokerages and forex accounts that require a few grand to get started. With binary options you can open accounts with most sites for a few hundred bucks. This is perfect for many traders who are trading on the side and do not want to invest a lot. We like to say that most traders should start with a deposit of at least $500 if possible. This allows you to utilize better binary money management tactics which is crucial for long term success.
  • Low cost way to trade a lot of different underlying instruments. You can trade stocks to commodities to currencies to indices with binary options. Some brokers offer 80 or more different assets for you to choose from. Where else can you trade and profit from commodities like gold or oil for $10, or even $100. Where else can you trade stocks like apple or google for $20? You can make binary option trades for as little as $1 (where?). This enables you to have access to a wide range of markets, which means when conditions make trading impossible in one, you might find optimal conditions in another. There are many chances to find good setups.
  • Big Returns Possible Swiftly – An advantage of trading binary options is speedy returns. You can make one trade per day and make 75-90% profit if you choose. You could even trade faster expiry times and most people trade 15, 30 minute or hourly options. If you are really feeling the need for fast returns, you can even trade one minute options (https://www.bestfxbrokers.com/binary-trading/60-second-options/).
  • Trade different types of binary options. Many brokers will let you not only trade High/Low, but also do One Touch, No Touch, and Boundary trades. These all offer you different ways to profit in different situations. Boundary trades in particular provide a unique means of profiting; you can literally profit on price not moving in these trades. It’s usually challenging to make money in ranging markets, but with Boundary trades it may be easier. Brokers which offer you rollover and early closure give you even more control over your trades. Option Builder (choose your own expiry period) is also great.
  • Simple to learn and understand. You can learn the basics of how to use binary options platforms in under five minutes. This shouldn’t lure you into complacency; instead look at it as freeing up your time to learn more about how to trade intelligently and consistently using a trading method.

Binary Options Cons:
Make no mistake – you can get burned trading binary options. You should only do so responsibly and with funds you can afford to lose. It’s not all fast money and huge returns. With those returns come risk. Do not forget that.

  • Poor regulation and shady spots in history. Right now so many binary options brokers are unregulated. In other types of trading (Forex for example), regulation is the norm. This makes it more challenging to find a trustworthy broker. We have a few good starting recommendations however, and strive to only list brokers with a legit history and reputation.
  • Tighter restrictions on trade sizes for the big high rollers. Some brokers have no exposure limits, but most restrict you to investing no more than several thousand dollars at a time, which can be problematic if you have a large bankroll and want to move a lot of money.
  • Limited demo testing capabilities. Note that this doesn’t apply to every binary options broker—just the majority. If you were going to trade Forex, you’d find that many brokers give you a demo platform you can use indefinitely. Most binary options brokers seem to skip this altogether, or only provide you with a demo platform you can use for a few days or a few trades. There are a few brokers with less restrictive demo platforms however such as Banc De Binary and MarketsWorld.
  • Simple to learn and understand. Yes, this is arguably also a con. While it’s great to be able to use a trading platform in minutes, it can encourage traders to believe that they know all they need to in order to become profitable in minutes as well, which is never the case. As long as you have realistic expectations and you’re dedicated to putting time into learning what you need to, this should not be a problem for you.

Binary options – The pros and cons

Binary options are an emerging as a fan favourite among the online trading community, with the novel trading format gaining pace across the industry.

Online brokers are fast picking up binary options allowing their users to experience this new and exciting genre of online trading.

What is this type of trading?

Trading with binary options allows you to trade a wide variety of forex pairs, stocks and commodities but with a new twist. Binary options allows traders to choose a product and predict whether it will increase or decrease in value within a specific time period. The fundamentals are extremely simple, predict correctly you win, incorrectly you lose. The size of your loss or gain is dependent on the size of the increase or decrease that product sees.

Now that you know the basics, below we’ve listed out the key pros and cons of this format to help provide some insight before you get stuck in.

Pros of binary options trading

Ease of use: When compared to a traditional trading format, binary options trading is really rather simple. Traders of any level are able to find it enjoyable, straightforward and profitable as it doesn’t require much (if any) complex decision making. This results in it being a perfect choice for many online traders who don’t want to get involved in the nitty gritty of complex trading. You simply select your variables and predict the direction against the value the broker offers, all of which can be done from a single dashboard.

Risk management: Online traders can afford to rest sound a night in this department. Managing your risk isn’t a pressing issue when it comes to binary options as the level of risk you choose to take can be managed, tracked and reined in. This form of trading allows you to apply or set a risk tolerance depending on the size of each position you take. If your prediction is off and everything goes wrong, you’ll be reimbursed with the rebate amount and will not lose the entirety of the money you risked.

Quick payoff: Compared to most other forms of trading, the return on your capital investment when trading binary options is very quick. Brokers will also often offer somewhat of a payoff on your investment which can sit as high as 70%. You can often see this return within hours, or even minutes. Even when your prediction is off and everything turns sour, you won’t always make a complete loss. There’s always the possibility of receiving a small percentage rebate.

Cons of binary options trading

High risks: Like with conventional trading, if you’re aiming to reap the rewards and turn a higher profit, you’re going to have to put your money on the line. Big payoffs come as a result of bigger risks. The brief time frames that you operate in with Binary options also contribute to the high risks associated with the format. Market movements will be inconsistent and difficult to predict so you have to strike while the iron is hot.

Best Binary Options Brokers 2020:
  • Binarium
    Binarium

    Best Binary Options Broker 2020!
    Good Choice for Beginners!
    Free Trading Education, Free Demo Account!
    Get a Sign-Up Bonus Now!

  • Binomo
    Binomo

    2nd in our ranking!

Few trading tools: Binary option brokers like ETX Capital will often provide a number of informative materials and tools to help and support your decision making, however these tools aren’t always available on your base of operations, the primary dashboard. With the fast paced, high risk nature of this format, it’s relatively easy to get caught up in the moment. You may react instinctively without checking your KPI’s (key performance indicators) and end up in a sticky situation.

Binary Options Trading is an interesting and novel trading form that is fast becoming a favourite among online traders. You can give it a go for yourself on a number of online brokerage sites, and see what the fuss is all about.

What are Binary Options?

Shanthi Rexaline
Contributor, Benzinga

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Derivative contracts were born because of people’s innate desire to circumvent uncertainty. A derivative contract is a contract drawn up between two parties, the price of which is derived based on an underlying asset.

Table of contents [ Hide ]

The widely-used derivatives include futures, options, swaps, and warrants. A futures contract provides for buying or selling an asset at a predetermined price at a future date, while an option contract allows the purchaser of the option the right to sell or buy a specific asset at a later date at an agreed-upon price.

Apart from the basic, plain vanilla put and call options, variants called exotic options are also available. An exotic option is a little more complex, with special features or pay-off structures intended to meet specific needs of investors.

One example of an exotic option is the binary option.

What are binary options?

Binary options, as the name implies, has two possible outcomes:

  1. The price of the underlying asset finishes either above or below the specified price at the specified time. It can be categorized as one of the simplest financial assets.
  2. Based on a “yes” or “no” proposition, it allows an individual to trade, although the risk, as well as profit potential, are capped.
Binary options basics

Evolution of binary trading options

Binary options became available for retail traders following SEC approval in 2008.

Previously, binary options trading existed but was available only to banks, institutional investors or high net-worth individuals through the over-the-counter market.

In 2007, when the subprime mortgage crisis began to rear its ugly head, the Options Clearing Corporation, or OCC, embarked upon the job of developing regulatory framework for the options market, while also proposing changes to upgrade binary options to the status of a financial asset that could trade as a standalone instrument in major exchanges.

Following SEC approval, the Chicago Board Options Exchange (CBOE) and the American Stock Exchange offered binary options to retail traders. In its early days, binary options came with a lot of restrictions such as the availability of merely call options and options on the S&P 500 Index.

Slowly and steadily, the popularity of binary options increased amid the broadening of the variety of binary options available for trading and the improvement in the trading software that now allows online and mobile app trading.

Types of binary options

  • High/low option (above/below option): This is the most popular type of binary option. An investor bets on the underlying asset going above or below the predetermined price at the time of expiration.
  • Touch option: An asset will touch the strike price at the time of expiration.
  • Range option : The asset is in a predetermined range by the time of expiration.
  • 60 seconds option: As the name suggests, the 60 seconds option expires in 60 seconds from the time of purchase. A trader in the 60 seconds option should be quick and adequately backed up by a trading software with a best-in-class charting program.

Cash-or-nothing vs. asset-or-nothing

There are two forms of options: cash-or-nothing and asset-or-nothing.

A cash-or-nothing option pays a trader a fixed amount of money or nothing at all, while an asset-or-nothing options also has a fixed payoff but the payoff is equal to the price of the asset.

Other terms

  • Underlying asset: The asset on which the binary option is based upon, or a security used in the binary options contract.
  • Call: An option contract drawn up by a trader who believes the price of the underlying asset will increase by the time the option expires.
  • Put: An option purchased by a trader who believes the price of the underlying security will drop by the time the option expires.
  • Strike price: The price of an underlying asset at the time of the purchase of the binary option, compared against the price of the asset at the time of the expiry of the option.
  • In-the-money, or ITM: An option is in-the-money if a call option’s strike price is below the market price of the underlying asset, or if the strike price of a put option is above the market price of the underlying asset.
  • Out-of-the-money, or OTM: When the strike price of a call option is above the market price of the underlying asset or when the strike price of a put option below the market price of the underlying asset, then the option is out-of-the-money.

Breadth of underlying assets

Binary options provide for trading a host of underlying assets, some of which are:

Binary options example

Assume the bid and ask price of a binary options contract for the EUR-USD currency pair at greater than $1.415 are $30 and $34, respectively. A trader who believes the pair will close above the $1.415 level at 4 p.m. ET, will buy the call option at $34.

Since the option can increase in value to $100 or drop to $0 depending on how the EUR-USD pair moves, a traders makes a profit of $66 (if the pair trades above $1.415 at the specified time) or incurs a loss of $30 (if the pair trades below) $1.415 at the specified time.

Sample binary options trade

The price of the binary option is determined by the market, based on the likelihood of the proposition implied by the contract coming true. If the odds are less, the option price will be low (say $10 or $15).

If you invest $100 in a call option in the S&P 500 Index, which is currently trading at 2,875 (strike price), with an expiration time of 30 minutes, you stand to gain $100, plus a payout (if specified in the contract) if the index is above 2,875 at the expiration time.

The expiration time can be the last traded price or the average of the bid and ask price, depending on the terms set by the broker.

However, if your binary option expires out of the money, or the index is trading below the strike price, you stand to lose your $100.

If the market price is exactly at the strike price at the time of expiration, then you preserve your investment, without any profit.

Advantages to binary options trading

  • You’ll know both the risk and reward in advance, or at the time a contract is struck
  • Binary options expire quickly and can generate substantial returns with a few quick, successful trades. Expiry period could range from 15 minutes to up to a week or two.
  • Investments could be as little as $10.
  • Binary options provide an opportunity to trade with a wide range of assets available all over the world.

Disadvantages of binary options trading

  • Since some of the binary options brokers are loosely regulated, you might face the risk of losing your money if your broker opts to hoodwink you.
  • Since binary options trading is more of a speculative activity, despite the research and analysis going into it, the outcome of the investment is not always a certainty.
  • Earnings potential is limited relative to the movement in the underlying asset. Despite whether an underlying instrument moves $1 or $100 in the desired direction, your return is limited to the price of the binary option.

Brokers that allow binary options

You’ll find that a lot of brokers allow for binary options trading. However, some of them aren’t trustworthy or fall far below the threshold for acceptable brokerages. You can read more about this in our Best Binary Options Brokers guide.

Final thoughts

Since binary options trading comes with its own set of pros and cons, you’ll have to determine if it’s the right way to go for you. After all, limited regulations and limited profit potential can render it an unattractive option. However, there’s no denying of the fact that binary options are an excellent practice ground for a beginner who wants to take the plunge.

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Best Binary Options Brokers 2020:
  • Binarium
    Binarium

    Best Binary Options Broker 2020!
    Good Choice for Beginners!
    Free Trading Education, Free Demo Account!
    Get a Sign-Up Bonus Now!

  • Binomo
    Binomo

    2nd in our ranking!

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