Binary options

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    binary option is a type of option which will pay either a fixed return or nothing at all depending on whether a condition of the option is met.

    They can be bought against most financial instruments and give traders the opportunity to go long or go short within a specified time frame (which could be anything from a minute to the end of the trading day).

    Unlike with a traditional option, once you have purchased a binary option, it is not possible to resell it before the expiration of the contract.

    Binary options can also be referred to as “digital options”, “all-or-nothing options” and “fixed return options”.

    Where can I learn to trade binary options?

    We have a free course for you about binary options trading at Tradimo.

    How do binary options work?

    If, for example, you purchased a binary option for shares of a particular company, the contract is likely to stipulate that you would receive a fixed return if the shares of that company are trading above a strike price at the expiration date of the option i.e. if the contract expires “in the money”.

    If, however, the shares of that company are trading below the strike price at the expiration date of the contract, the contract will have expired “out of the money” and you would receive nothing at all.

    In simple terms, the trader makes a decision about market direction i.e. up or down.

    The name is therefore derived from the meaning of binary in the sense that there are only two possible outcomes.

    Advantages and criticisms

    Binary options are considered a relatively simple way to trade because the participating trader only needs to understand market direction. The risk involved is clear from the outset, as is the potential return and that return can be achieved even if the contract only just expires in the money e.g. by a single pip.

    Critics have voiced concerns about a lack of regulation in this area and have argued that trading with binary options is gambling as opposed to investing.