Binary options are trading options that require you only to predict the direction of the price movement. If your prediction is correct at the time of expiry, you will receive a fixed payout. If your prediction is incorrect then you will lose your initial investment and will not receive any payout. Binary options are some of the simplest trading options that are available; because as a trader you know exactly what you stand to gain, and what you stand to lose.
Binary options are a mass market financial instrument that allow traders to use a flexible approach without dealing with the intricacies of traditional trading options. Binary options can be used to hedge your portfolio or for short-term speculation. These options give you the opportunity to enjoy high payouts in a short amount of time and because of this, binary options are gaining popularity all over the world. Binary options contracts are available on several underlying assets including commodities, stocks, indices and currencies. When trading binary options, you will need to place a put or call option. A put option means that you predict that the price of an underlying asset will decrease from the current price at the time of expiry, while a call option means you predict that the price will increase. If your prediction is correct, you will finish ‘in the money’and make a profit. You will finish ‘out of the money’ if your prediction is incorrect. Sometimes your trade will finish ‘at the money’ which means the price of the underlying asset is the same as the time of expiry and at the time you opened the trade. If this happens you will usually be given your initial investment back.
Binary options are similar to traditional options because the payout is based on the price of an underlying asset at the expiry time. However, traders only need to correctly predict the direction of the price movement instead of the magnitude of that movement when trading binary options. The primary difference between binary options and traditional options are the gains and losses. Binary options offer a fixed rate of return and a loss of your initial investment. With traditional trading options the gains can be infinite which makes them much riskier than binary options.