Basically, when you "buy" a BO, you set the conditions at purchase. Typically you define whether the price of an equity, currency, commodity or whatever will have risen or fallen within a time frame which you specify. You also define how much you want to invest and what percentage of return you want to receive (based on what the broker is willing to offer or course). Let's say you decide to invest $100 that the price of the USD/JPY currency pair will go up within, say, at the end of the next hour. The broker may decide to offer you a nett profit of 75% if your prediction is correct.
Once all this has been defined and the deal made, there's usually no way out. You usually cannot, for example, decide to back out of the deal or change your mind later on. So you have to wait until 1pm, staring at the chart as it goes up and down and hoping you're right. If you're right and USD/JPY price is higher than it was at 12pm (doesn't matter by how much) when you bought it, you get your $100 back as well as a tidy $75 profit. If you're wrong you lose the $100. Simple.
Some brokers allow you to close the option before expiry. Using our example above; lets say at 12pm you bought an option that USD/JPY will have gone up at precisely 1pm. By 12.45pm you see every indication that this is not going to happen, some brokers MAY allow you to sell the option, typically at a loss to you in this situation (or a lesser profit than the defined 75% if the situation were reversed). This serves as an "ejection seat" should things not go according to plan or you decide that the lesser gain is preferable to the possibility of a total loss. This "bug out" option also has an expiry point. In our example it may perhaps be available for only 50 mins of the hour. So you will have to decide by 12.50pm. Beyond that the option is no longer available and you'd be in the lap of fate for the last 10 mins.
That's BO in a nutshell.
The "catch" is that the industry is full... and I mean FULL of scammers. This is because it's still very new and relatively unregulated, and although popular because of it's simplicity and fast profitability, it's extremely hazardous because of it's anonymous "online" nature and the very, very many shady, disreputable brokers in it. Horror stories include being unable to make withdrawals, chart and price tampering, extreme lag and or chart lockouts just before and during option expiry, many hidden rules and requirements and ridiculously long delays when you want to take your profits. These are just those off the top of my mind. Trust me, there are many others.
Many would also argue that BO is "unfair" or that the trader has the odds stacked against him. I'm not sure if I agree with that. I mean if you are a thinking adult, you would know what you're getting yourself into. I can't accept that a mature trader who invests in BO and legitimately loses money due to poor planning or lack of knowledge and understanding and NOT scamming and then blames the system, saying that it's "unfair". You read the terms of the agreement. You agreed to them. You can't blame anyone for the choices you make yourself. If it's "unfair" yet you participated in it, and lost your money, then you only have your own greed, ignorance and stupidity to blame.
Personally I think anyone who wants to invest in BO can do so if they want to. But much in the same way smokers risk cancer if they want. Looking at the industry as a whole, it's my personal opinion that it's a way for the vast majority of traders to lose money FAST. Only the most cautious, experienced and knowledgeable traders can prosper in BO. However, it's absolutely CRUCIAL to make sure that the broker he/she decides to work with is a legitimate one. There DO seem to be some out there who are honest. I dare not however vouch for any of them until I take the time and necessary steps to ensure they are legit.
It's true that Binary Options are simple and has potential for good profits, but it's also true that it's also hazardous and risky in the extreme.
You have been warned.
