Speculating on the Binary Options Market

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A Guide to Trading Binary Options in the U.S.

Binary options are financial options that come with one of two payoff options: a fixed amount or nothing at all. That’s why they’re called binary options—because there is no other settlement possible. The premise behind a binary option is a simple yes or no proposition: Will an underlying asset be above a certain price at a certain time?

Traders place trades based on whether they believe the answer is yes or no, making it one of the simplest financial assets to trade. This simplicity has resulted in broad appeal among traders and newcomers to the financial markets. As simple as it may seem, traders should fully understand how binary options work, what markets and time frames they can trade with binary options, advantages, and disadvantages of these products, and which companies are legally authorized to provide binary options to U.S. residents.

Binary options traded outside the U.S. are typically structured differently than binaries available on U.S. exchanges. When considering speculating or hedging, binary options are an alternative—but only if the trader fully understands the two potential outcomes of these exotic options.

Now that you know some of the basics, read on to find out more about binary options, how they operate, and how you can trade them in the United States.

U.S. Binary Options Explained

Binary options provide a way to trade markets with capped risk and capped profit potential, based on a yes or no proposition.

Let’s take the following question as an example: Will the price of gold be above $1,250 at 1:30 p.m. today?

If you believe it will be, you buy the binary option. If you think gold will be below $1,250 at 1:30 p.m., then you sell this binary option. The price of a binary option is always between $0 and $100, and just like other financial markets, there is a bid and ask price.

The above binary may be trading at $42.50 (bid) and $44.50 (offer) at 1 p.m. If you buy the binary option right then, you will pay $44.50. If you decide to sell right then, you’ll sell at $42.50.

Let’s assume you decide to buy at $44.50. If at 1:30 p.m. the price of gold is above $1,250, your option expires and it becomes worth $100. You make a profit of $100—$44.50 = $55.50 (minus fees). This is called being in the money. But if the price of gold is below $1,250 at 1:30 p.m., the option expires at $0. Therefore you lose the $44.50 invested. This called out of the money.

The bid and offer fluctuate until the option expires. You can close your position at any time before expiry to lock in a profit or a reduce a loss, compared to letting it expire out of the money.

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A Zero-Sum Game

Eventually, every option settles at $100 or $0—$100 if the binary option proposition is true and $0 if it turns out to be false. Thus, each binary option has a total value potential of $100, and it is a zero-sum game—what you make, someone else loses, and what you lose, someone else makes.

Each trader must put up the capital for their side of the trade. In the examples above, you purchased an option at $44.50, and someone sold you that option. Your maximum risk is $44.50 if the option settles at $0, and so the trade costs you $44.50. The person who sold to you has a maximum risk of $55.50 if the option settles at $100—$100 – $44.50 = $55.50.

A trader may purchase multiple contracts if desired. Here’s another example:

  • NASDAQ US Tech 100 index > $3,784 (11 a.m.).

The current bid and offer are $74.00 and $80.00, respectively. If you think the index will be above $3,784 at 11 a.m., you buy the binary option at $80, or place a bid at a lower price and hope someone sells to you at that price. If you think the index will be below $3,784 at that time, you sell at $74.00, or place an offer above that price and hope someone buys it from you.

You decide to sell at $74.00, believing the index is going to fall below $3,784 (called the strike price) by 11 a.m. And if you really like the trade, you can sell (or buy) multiple contracts.

Figure 1 shows a trade to sell five contracts (size) at $74.00. The Nadex platform automatically calculates your maximum loss and gain when you create an order, called a ticket.

Nadex Trade Ticket with Max Profit and Max Loss (Figure 1)

What You Need To Know About Binary Options Outside the U.S

Binary options let traders profit from price fluctuations in multiple global markets but it’s important to understand the risks and rewards of these controversial and often-misunderstood financial instruments. Binary options bear little resemblance to traditional options, featuring different payouts, fees, and risks, as well as a unique liquidity structure and investment process.

Binary options traded outside the U.S. are also structured differently than those available on U.S. exchanges. They offer a viable alternative when speculating or hedging but only if the trader fully understands the two potential and opposing outcomes. The Financial Industry Regulatory Authority (FINRA) summed up regulator skepticism about these exotic instruments, advising investors “to be particularly wary of non-U.S. companies that offer binary options trading platforms. These include trading applications with names that often imply an easy path to riches.” 

What Are Binary Options?

Binary options are deceptively simple to understand, making them a popular choice for low-skilled traders. The most commonly traded instrument is a high-low or fixed-return option that provides access to stocks, indices, commodities and foreign exchange. These options have a clearly stated expiration date, time and strike price. If a trader wagers correctly on the market’s direction and price at the time of expiration, he or she is paid a fixed return regardless of how much the instrument has moved since the transaction, while an incorrect wager loses the original investment.

The binary options trader buys a call when bullish on a stock, index, commodity or currency pair, or a put on those instruments when bearish. For a call to make money, the market must trade above the strike price at the expiration time. For a put to make money, the market must trade below the strike price at the expiration time. The strike price, expiration date, payout, and risk are disclosed by the broker when the trade is first established. For most high-low binary options traded outside the U.S., the strike price is the current price or rate of the underlying financial product. Therefore, the trader is wagering whether the price on the expiration date will be higher or lower than the current price.

Binary Options Outside the US

Foreign Versus U.S. Binary Options

Non-U.S. binary options typically have a fixed payout and risk, and are offered by individual brokers rather than directly on an exchange. These brokers profit on the difference between what they pay out on winning trades and what they collect on losing trades. While there are exceptions, these instruments are supposed to be held until expiration in an “all or nothing” payout structure. Foreign brokers are not legally allowed to solicit U.S. residents unless registered with a U.S. regulatory body such as the Securities and Exchange Commission (SEC) or Commodities Futures Trading Commission (CFTC).

The Chicago Board Options Exchange (CBOE) began listing binary options for U.S. residents in 2008.   The SEC regulates the CBOE, which offers investors increased protection compared to over-the-counter markets. Chicago-based Nadex also runs a binary options exchange for U.S. residents, subject to oversight by the CFTC. These options can be traded at any time, with the rate fluctuating between one and 100, based on the current probability of the position finishing in or out of the money. There is full transparency at all times and the trader can take the profit or loss they see on their screen prior to expiration. They can also enter as the rate fluctuates, taking advantage of varying risk-to-reward scenarios, or hold until expiration and close the position with the maximum gain or loss documented at the time of entry. Each trade requires a willing buyer and seller because U.S. binary options trade through an exchange, which makes money through a fee that matches counter-parties.

High-Low Binary Option Example

Your analysis indicates the Standard & Poor’s 500 index will rally for the rest of the trading day and you to buy an index call option. It’s currently trading at 1,800 so you’re wagering the index’s price at expiration will be above that number. Since binary options are available for many time frames—from minutes to months away—you choose an expiration time or date that supports your analysis. You choose an option that expires in 30 minutes, paying out 70% plus your original stake if the S&P 500 is above 1,800 at that time or you lose the entire stake if the S&P 500 is below 1,800. Minimum and maximum investments vary from broker to broker.

Say you invest $100 in the call that expires in 30 minutes. The S&P 500 price at expiration determines whether you make or lose money. The price at expiration may be the last quoted price, or the (bid + ask)/2. Each binary options broker outlines their own expiration price rules. In this case, assume the last quote on the S&P 500 before expiration was 1,802. Therefore, you make a $70 profit (or 70% of $100) and maintain your original $100 investment. If the price finished below 1,800, you would lose your original $100 investment. If the price expires exactly on the strike price, it is common for the trader to receive her/his money back with no profit or loss, although brokers may have different rules. The profit and/or original investment is automatically added to the trader’s account when the position is closed.

Other Types of Binary Options

The example above is for a typical high-low binary option—the most common type of binary option—outside the U.S. International brokers will typically offer several other types of binaries as well. These include “one-touch” options, where the traded instrument needs to touch the strike price just once before expiration to make money. There is a target above and below the current price, so traders can pick which target they believe will be hit before the expiration date/time. Meanwhile, a “range” binary option allows traders to select a price range the asset will trade within until expiration. A payout is received if price stays within the range, while the investment is lost if it exits the range.

As competition in the binary options space heats up, brokers are offering additional products that boast 50% to 500% payouts. While product structures and requirements may change, risk and reward is always known at the trade’s outset, allowing the trader to potentially make more on a position than they lose. Of course, an option offering a 500% payout will be structured in such a way that the probability of winning the payout is very low.

Unlike their U.S. counterparts, some foreign brokers allow traders to exit positions before expiration, but most do not. Exiting a trade before expiration typically results in a lower payout (specified by broker) or small loss, but the trader won’t lose his or her entire investment.

The Upside and Downside

Risk and reward are known in advance, offering a major advantage. There are only two outcomes: Win a fixed amount or lose a fixed amount, and there are generally no commissions or fees. They’re simple to use and there’s only one decision to make: Is the underlying asset going up or down? In addition, there are also no liquidity concerns because the trader doesn’t own the underlying asset and brokers can offer innumerable strike prices and expiration times/dates, which is an attractive feature. The trader can also access multiple asset classes anytime a market is open somewhere in the world.

On the downside, the reward is always less than the risk when playing high-low binary options. As a result, the trader must be right a high percentage of the time to cover inevitable losses. While payout and risk will fluctuate from broker to broker and instrument to instrument, one thing remains constant: Losing trades will cost the trader more than she/he can make on winning trades. Other types of binary options may provide payouts where the reward is potentially greater than the risk but the percentage of winning trades will be lower.

Speculating on the Binary Options Market

Thanks to modern technology and access to the internet, many opportunities have opened up for anyone who desires to earn money online from nearly any place on the globe. One of these is speculating on the market with binary options, which are futures contracts that enable you to earn a heavy profit through an incredibly simple algorithm. This article will fill you in on everything you’d ever wanted to know about speculating on the binary options market.

What Are Binary Options

We’ll find out, for starters, what this financial tool is, where it came from and the secret to its popularity. So, binary options have existed as a tool in the financial sphere since 2008. A decade has already come and gone since the moment when the first trader opened a trading terminal and placed a winning trade. They were “born” on the Chicago Financial Exchange (CFE) that, in the midst of the international financial crisis, created a simplified version of “vanilla” options, accessible to everyday people both technically and financially. When binary options appeared, traditional “vanilla” options had already been around since the late 90’s, especially for large companies, hedge funds and financial conglomerates who could better diversify risk and earn additional income with their aid.

These kinds of options are still around today, however, they have a more complex structure and require larger investments. To put it simply, the principle behind traditional options is buying/selling in the future a specific asset price the moment the trade is closed on the exchange. When the financial crisis hit, the demand for “vanilla” trading dropped, so the leaders in CFE decided to make traditional options binary, with a simpler working principle and significantly lower minimum threshold per contract.

Binary options are also contracts on the exchange, however, their acting principle lies in the materialization of either the growth or decline of asset price through the course of a predetermined time period. More simply, to close a trade you must correctly determine ahead of time where on the asset chart the price will move to, either above or below the place it is situated when the trades are placed. If your forecast is correct, following the trade’s fruition, you will earn up to a 90% return on the initial investment, although, if it is incorrect, you will lose all funds investment. There is no need to physically acquire assets, only to correctly forecast their rate movements on the chart, BUYING if the prediction is up, SELLING if the prediction is down:

You either make a profit or lose the entire investment when the trade is closed. This binary logic lead to the name of this type of contract, that has opened to door to the financial market to even the most average of joes.
Simply put, nothing that has been described here is innovative in any way. Even in the 70’s of the last millennium, during the Great Depression in the States, there were companies who took out short-term stakes on the future value of securities. Meaning that the option we have before us today is a modernized, well-advertised version of the old practice of betting on rates.

Why has speculating on the binary options market become so popular? The leading factor is financial access. The issue is that, in order to speculate on currencies, funds or raw material goods, you need to have a large capital at your disposal, totaling to thousands of dollars, then you need to physically acquire the national currency, corporation asset or gold. You can start speculating on the binary options market with as little as a $10 dollar deposit. The short period for earning profit plays a significant role in their popularity as well, with periods starting from 60 seconds. Meaning that if, for example, you place a trade with $100 dollars, in only a minute you can earn 90 dollars of pure profit. This type of profit can’t be made on any other existing tool online.

Where Can You Speculate On the Binary Options Market

You have one of two options as to where you can speculate on the binary options market or the futures market as it is sometimes called. You can either go through official exchanges, such as the CFE, Cantor, or the CME, or the online platforms of brokerage companies. In general, the majority of traders in most countries only are able to access the latter option, as all the official options exchanges are located in the US, and are closed to Russia, CIS and many other countries all over the world. Moreover, trading on options exchanges is less lucrative as American exchanges set high entrance thresholds, offer a very limited assortment of assets and don’t provide fixed percentages of profit. Of course, if you really want to, you could trade on the exchanges’ official online platforms, to avoid the traffic, study complex English-language contracts and cough up huge starting deposits. However, as experience shows, the profitability of trades on the official exchanges don’t compensate for the conditions put on traders. Moreover, speculating with binary options on the exchanges hasn’t even gained popularity amongst Americans themselves, who also aren’t thrilled with the aforementioned trading conditions.

Therefore, the most accessible and, at the same time, profitable option is speculating with binary options outside the confines of the exchanges, made available through online brokers. Don’t worry about going around official exchanges, as these companies are legal entities as well, they are licensed by financial regulators and provide you access to real exchange asset rates on the chart. Meaning that you receive the very same financial tools as American traders, but with much less hassle, both to you and your wallet.
You can start speculating with these companies without any confusing red tape and with nearly any amount of starting capital. Of course, to trade, you need to go through a registration process, although, unlike the official exchanges, this can be completed very quickly. For example, it only takes several minutes and $10 dollars or more of starting capital to register on most of platforms. Many platforms offer trades starting from $1 dollar as well. When you register, a demo account is automatically opened with a virtual trading balance, enabling you to gain all the experience you need without risking any of your personal savings.

Trading Platform

Speculating online is conducted through a trading terminal, it is necessary for trading, enabling lucrative trading from the comfort of your couch. The trading terminal itself is a unique web program, loaded on the broker’s site with your chosen chart for asset trading and manually for opening options. There are often 50 various assets for price forecasting on trading platforms, such as currency pairs, oil, gold, and cryptocurrencies. You can open the rate chart for any individual asset you’ve chosen, as well as the interval and the type of price display. The interval is equipped with specialized tools for market analysis, enabling you to forecast analytically, not blindly. Typically professional trading software for speculating looks like this:

How to Earn a Profit From Binary Options

We have finally reached the main question regarding how to profit from speculating on the binary options market. In this plan, it is worth mentioning off the bat that it isn’t enough to know just one approach to speculating because if you open options at random, assuming future price fluctuations, you will lose all your investments right away.

Your trading experience begins with completing a basic educational course. It is vital for every trader, regardless of if you are economically and financially literate or not. The point is that no one can conduct this kind of speculating through intuition alone. The trading process is conducted with the help of technical and fundamental market analysis, enabling you to forecast, with roughly 85% accuracy, where the price will move next. Specialized trading strategies are used in analysis. They are combinations of various expected price behavior conditions, the appearance of which is generally considered to signal further price movement. Precisely in order to learn the approaches to forecasting the market and how to use trading systems, it is vital to go through an educational course. Furthermore, these courses are available on the brokerage platforms completely free and are made up of easy-to-understand materials, such as dictionaries of trading terminology, step-by-step instructions, interactive books and video lessons. Therefore, you really need to spend a bit of time studying materials at your disposal and gaining some experience on a demo account.

Speculating in Practice

There are a ton of effective trading strategies that you can apply to the binary options market that produce profit no less than 80% of the time. That means that 8 out of 10 trades opened will be profitable when using a trading system. It isn’t possible to go through all the approaches to analysis in one article. You can learn more about them in the educational materials available. In this article, we will provide an example of speculating with a simple trading strategy, based on the Moving Average and the MACD. They should be set up on your chart, displayed with candles and the interval M1. These indicators should have the following parameters, which will identify the points when the asset price shifts short-term

● EMA, period 10
● EMA, period 5
● MACD with no changes to the setup

The indicators’ trading signal will appear in the chart as an intersection of the EMA lines in a specific direction and an intersection of the lines with the same direction in the MACD window. As you can see in the screenshot, the indicators show 2 lucrative rate reversal signals, where you can close the contract profitably.

If you place trades using the trading signals of these technical indicators, you must set the expiration period within the range of 5-10 minutes, depending on how volatile the price movement is.
That is how this approach to speculating on the binary options market looks. It is the easiest and most accessible way to make a profit online with minimal starting capital required.

“General Risk Warning: Binary options and cryptocurrency trading carry a high level of risk and can result in the loss of all your funds.”

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  • Binomo
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