Binary options are derivatives and can be traded on any instrument or market. They are attractive although they are straightforward. You know just how much you will win or lose before you perform a trade. There is no need for complex calculation and mathematics. Therefore, they are often referred to as ‘all or nothing.’
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The binary option expires where the buyer receives the payout or loss of investment on the premise of if the option expires in-the-money (ITM). The binary option depends on om the outcome of the yes/no proposition, hence the name “binary”. They have an expiry date and time. At the time of expiration, the option must be on the correct side of strike price i.e In-The-Money for the trader to make a profit. A binary option automatically exercises, which means the gain or loss on the trade will be automatically credited or debited to the trader’s account.
How do they work & example?
A binary option may be as simple as whether the share of company XYZ will be above $30 on Dec 22 at 11.00 am. The trade makes a decision either yes or no. Let’s say the price of the share will be trading above $30 on that date & time and is willing to stake $100 on the trade. If XYZ trades above $30 at that date and time, the trade receives a payout per term agreed. For eg., If the payout was 80% the binary broker credits the account with 80%. If the trade was below $30 at that date and time, the trade was wrong and loses their trade $100 investment in the trade.
Advantages of Binary Options
- You can start with low investments: It is not necessary to bet high in binary options. Therefore it is easy to start with low investments until u get used to it. You can start with less risk and then extend your risk as you get more experience.
- The risk involved is minimal & limited: The risk is minimal because there is only a slight amt of money you can decide how much risk you are willing to take. you can make good profits even by taking minimal risk. It also allows you to pick and limit the quantity of risk you are exposed to.
- The returns are high & come fast: The amount of time per trade in binary options is effective and is the only thing that differs from the common financial exchange.
- Your trading is not dependent on marketing condition: The various strategies used in binary option is something you need to be aware of so you can adopt them. The strategies you have adopted may help you to lead you into a winning future.
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Disadvantages of Binary Options
- Risk of being scammed by brokers: The binary option in many countries has been found out as a frauding platform by brokers. There are cases that money users made through predictions were not paid by the scam brokers.
- No demo accounts: The binary options trading does not provide a demo account, which makes it a huge platform for the broker. And since it cannot include one broker cannot test and check trading for them to learn how the platform works and its basis without risk of losing money.
- Market regulations: Since very few binary options brokers are regulated, this is not available for trading with binary options. Tracking is not available for money invested and winning via government or authorities. Regulated markets are preferred by entrepreneurs who are investing and planning to start a business.
Bottom Line: Binary options trading, like every other business, has many benefits and drawbacks. Although the returns are normally up to 90 percent. The binary options trading works fast and gives a high return but there are still certain disadvantages. Look for trusted brokers with demo accounts before involving real money as a risk.
Author – Hariharan Krishnan
About the Author – Hariharan Krishnan is currently in second year BAF and is also doing FRM part 1. He is passionate about financial markets and loves to play chess and outdoor games.