Binary Options - What are they and how do they work?

[FxMaster]

This guy is absolutely a spammer who ads for those Binary Options broker.

Indeed and she (from her profile name) already marked as a spam

 

[iMusingKiMi]

Indeed and she (from her profile name) already marked as a spam

Good one. 1st post and try to advertise.

 

[Xandra123]

Hello Everyone, I am a binary trader from January 2012. This business is very unique as it is very simple to understand and return is massive and sometime about 500% on your initial investment (depends on your broker). To trade there are two basic types of binary options. The first, called a call, is bought when the trader expects the price of that option’s underlying asset to go up. If a given trader expects the price of that option’s underlying asset to fall, they would buy a put. With each binary option, there are two key pieces of information to remember. First is the strike price. This price level determines whether an option expires in the money or out of the money. Second is the date and time of expiry. With binary options, expiration can be as short as a few minutes and as long as several months. I am going to list some of the advantages as well as disadvantages of trading binary options.

Advantages

Your risk is defined which means you could only loose whatever you have invested.
No margin call or trade closure by broker before expiry time.
High return in very short time.
Profit from rising and falling market.
No spread so you could win even with .1 pip

Disadvantage

All most all of brokers offering binary options are not regulated.
You could loose all of your investment in few minutes.
Most of binary option brokers are illiquid and are bucket shops.


Things to consider before choosing option broker.

Till today option brokers are not regulated but some brokers are making efforts to be regulated by Cyprus Securities and Exchange Commission as most of brokers dwells in Cyprus. Only one broker is regulated by ASIC but my personal experience with them is not very good. You could search about them online. Do not invest your money if your broker claims following things :

We are market makers, Some OB (option Brokers) claims to be Market maker which is totally wrong and misleading information to traders.

If they claim to buy binaries from bank and sell them to you in which they get commission. No bank offers binary trading except some bank offers vanilla option but they are totally different from binary trading as their time period is monthly or at least weekly.

If they claim to be regulated by National Swiss Bank. Since when SNB become regulating agency for OB.

If they claim to be regulated by Reuters. WRONG ! Reuters provides platform for interbank trading as well as provides real time market data feed for various assets and is not a regulating agency.

Some broker write this statement "option price/quotes that is offered by us is not necessarily the real time of the underlying asset but rather the price that this broker is willing to offer the relevant option" This statement means that you may or may not get fair market price during expiry, fair market price is very important because you may loose big chunk of money with just with 0.1 pip although the real market price was in your favour.

Conclusion:

I have personally tried 5 different brokers (SS are available if anyone like to cross examine) and have concluded that till now OB don't offer transparency, fair option expiry price as well as funds security. You can pick different brokers and compare their expiry price and all of them would be having different expiry rates, even though most of them gets their feed from Thompson Reuters. We as a traders have to wait little more time for this business to develop to a point where we have sense of security and freedom to trade without fear.

Please feel free to comment since Sharing is caring.

Till next time.

Nice Post. Congratulations and Thank you.

 

[FXWarriory]

If they claim to be regulated by National Swiss Bank. Since when SNB become regulating agency for OB.

My mind almost got blown after read the quoted info and also this: https://www.forexpeacearmy.com/fore...binary-options-regulated-scam-brokers-10.html

Reviewing the broker website too, is it possible that Dukascopy is not approved by FINMA to provide binary service, but doing that just as many forex brokers who offer binaries too and hold FCA regulation for Forex, use it to raise its binary clients base while in actual the UK Gambling Commission is the one responsible of this business! Example too is ig.com

Anyone knows if there's a Swiss Gambling Commission? If yes, then all binary brokers are using disgrace against clients.

 

[jdet82]

fwiw to be honest i think mos tof the claims of regualtion are bogus.

if i have a problem with a broker who is regulated in cyprus, i am guessing that i am not goign to get any of my money back if its a scam, if i am looking at a broker who is regulated in australia and/or new zealand i knwo i will have a better chance as the regulators wont ess around when they hear a complaint!

i have been trading for over 6 months and came across so many dubious practices that i never committed real money until i was completely satisfied with the regulation of the broker if things were to hit the fan!

happy to say my research paid off and i am with a top class broekr that is a dream to deal with, and no withdrawal problems etc

 

[RahmanSL]

I am not 100% sure, but New Zealand registered brokers are just that....registered in N.Z.....and the Kiwi regulatory body doesn't offer protection to none Kiwi citizen. Do read up on their regulatory rules/regulations before you jump on a N.Z broker.

 

[irongoose]

Nadex is a US based Binary Options exchange and is regulated by the CTFC, this is the only Binary Options broker/exchange that I'd ever consider using based on everything I've read about trading Binary options. You can get a two week demo account from them to see if this is right for you.

I traded with there demo and I'm not convinced Binary Options are for me. One advantage is news trading because risk is fully realized once you take a contract and you don't have too be worried about getting stopped out and you have time on your side, but same token time can work against you also but Nadex allows you to close your contracts at any time before they expire. Nadex also offers something more like trading spot called bull spread options. Anyway I'm on the fence about Binary options personally but if you'd like to give it a try Nadex has a free two week demo.

 

[irongoose]

I agree and disagree with binary trading being liken to gambling, if you are trying to trade one minute binaries or 5 minute or even 20 minute binaries there is little to no way of being able to tell which direction they are going so consequently you are gambling when you take such trades.

On the other hand experienced inter day Forex traders often go for 20-40 pip profit takes and sometimes more! These movements don't take between 1-20 minutes to happen and often take an hour to all day. With that in mind one should trade binaries with the same mind set that someone who looks for 20-40 pip movements in the market would.

Of course there are advantages to choosing either spot trading or binary trading...........for one in spot its much easier to get stopped out were as in binary you can't, but in spot trading if the market runs a full 40 pips for you that trade will probably make you a lot more money then the same trade with a binary contract. One could trade multiple binary contracts to make up for the difference but you might find yourself risking more money then you would have if the same trade was a spot trade.

Another advantage to binary trading is if you think the market will be moving 40 pips you can take a binary that is only 10 20 30 pips from current price and then the market only has to move that far and stay above or below that price by the time it expires and you win the contract. Plus its possible to get some pretty cheap contracts the further away from the current price you go to where risk is minimal more so then a spot trade.

Of course on the flip side with spot trading you basically have forever for the price to reach profitability were as in binary its a term contract and its very possible that your binary contract doesn't reach profitability before the contract expires or price moves against it after it reaches profitability and there is still lots of time left in the contract. One can also trade with a lot less money then in spot because of the margin requirements for spot trades, important to those in America who can only get 50/1.

I don't know how other brokers work but I do know that Nadex lets you close contracts early and they can either be in the red or green but generally they aren't worth has much if you close them early but in the case of closing one in the red you can save yourself from taking a full hit.

In conclusion as you can see there are advantages and disadvantages to trading binary contracts and the bottom line is before getting into either spot or binary trading one needs to demo and get good at either one before using real money! If you think you're going to jump from spot trading to binary trading and do better after failing in spot YOU ARE FOOLING YOURSELF!!!! learn to trade first using a demo account so that you can make an informed decision on which advantages are better for you.

Things to consider first are............

A. Do you understand risk and reward?
B. Do you understand economic data and why it moves the market?
C. Do you have a trade plan before you press that button?
D. Do you even know what a trade plan is?
E. Have you tested that trade plan with a Demo account and does it work?

 

[irongoose]

To give everyone an idea how binaries work at least with Nadex I've posted this trade I took with my practice account. The candle chart shows I've marked the 119.60 level that I believe price will reach and stay above in the near future, now all I need to do is select a binary that I feel comfortable with.

In this case I've chosen a Binary that expires at 7 pm today Jan 5,2015 and the price it must reach and stay above is 119.60. The cost of this option was $48.50 and the contract pays $100.00 at expiration (7pm) meaning that my actual profit will be the difference between the cost ($48.50) and the contract payout ($100.00) in this case $100 - $48.50 = $51.50 and my lose will only be $48.50 no matter where price ends up. So if price rockets down to 118.00 I'll only lose $48.50, plus at no time can I be stopped out..............so if price rockets down to 118.00 and then returns to 119.61 by 7pm I win the contract payout of $100.00.



Now the value of these contracts are constantly changing as spot price moves up and down during the day and if this contract becomes profitable before the 7pm expiration time I can close it and take profit. Of course it won't be worth as much if I close it early but never the less I can If I want to and the same holds true if the contract is in the red.

If you look at the bottom of the trader page you'll notice my contract details, at the time the pic was taken the contract's (position) value had gone down to $35.00 from $48.50 because the spot price of the USD/JPY had moved lower from the price I opened the contract at and there for the contract's price adjusted accordingly and you can see I'm losing $13.50 under the profit/loss column. If I decided to exit the contract at this point I would lose $13.50.

On the trader page you'll notice a red column and a blue column, both contain prices. The blue column is buys meaning you think price is going up and the red column is sells meaning you think price will go down.

In the case of a buy the price being shown is the purchase price of the contract.

In the case of a sell the price being shown is the max profit you can make off the contract.

I hope this was helpful to anyone interested in trading binaries and happy trading!

One more thing, the two images in this post were created in FireFox with a add on called Abduction 3.5 that allows you to take snap shots of part or entire web pages. Some have complained that it doesn't work after downloading it, this from what I've read in the reviews happens in FireFox 32 and up and happened to me also. The way you fix this is by going into your extensions inside FireFox and locating Abduction 3.5 and clicking the options button and changing the default setting from PNG to JPEG.

 

[irongoose]

UPDATE: It doesn't look like I'm going to win the contract that expires at 7 pm tonight and at this point it looks like I'm going to take a full hit of $48.50!
I wasn't paying attention to the trade the entire time so I don't know if I could have exited the trade with less of a loss because at this point I can't close the trade anymore, I suspect they lock you in one hour before closing.