Understand Binary Options

By Stratx Markets Reviews

Know the two possible outcomesA trader of binary options should have some feel for the

anticipated direction in price movement of the underlying asset. Within most platforms the two choices are referred to as "put" and "call." Put is the prediction of a price decline, while call is the prediction of a price increase. Unlike traditional options, anticipating the magnitude of a price movement is not required. Instead, one must only be able to correctly predict whether the price of the chosen asset will be higher or lower than the "strike" (or target) price at a specified future time. If the investor has an opinion on an underlying asset and wants to place a trade, s/he can trade binary 0ptions.

Decide your positionEvaluate the current market conditions

surrounding your chosen asset and determine whether the price is more likely to rise or fall. If your insight is correct on the expiration date, your payoff is the settlement value of your contract. The return rate on each winning trade is established by the broker and made known ahead of time.

Learn how a contract price is determined.The price of a binary options contract is

roughly equal to the market's perception of the probability of the event happening. For example, if a contract has a settlement value of $100 and the last trade of the contract was $96.00, it is an indicator that approximately 96% of the market believes that the event is going to happen and the contract will end up in-the-money.

Learn the advantages of trading binary options over traditional options.Binary options are generally simpler to trade because

they require only a sense of direction of the price movement of the underlying asset, whereas traditional options require a sense of both direction and magnitude of the price movement. No actual assets are ever bought or sold, so the selling of shares and stop-losses are not part of the process.

Binary options always have a controlled risk-to-reward ratio, meaning the risk and reward are pre-determined at the time the contract is acquired. Traditional options have no defined boundaries of risk and reward and therefore the gains and losses can be limitless.

Learn the advantages of trading binary options over traditional options.Binary options can involve the trading and

hedging strategies used in trading traditional options. Both fundamental and technical analysis strategies can be used to increase the accuracy of price movement predictions.

Unlike a traditional option, the payout amount is not proportional to the amount by which the option ends up in-the-money. As long as a binary option settles in-the-money by even one tick, the winner receives the entire fixed payoff amount.

Learn where binary options are traded.Binary options are enormously popular in

Europe and are extensively traded in major European exchanges, like EUREX. In the United States there are a few places where binary options can be traded:

The Chicago Board of Trade (CBOT) offers binary options trading on the Target Fed Funds Rate. To trade these contracts, traders must be members of the exchange. Other investors must trade through a member. The value of each contract is $1000.

Learn where binary options are traded.Nadex is a U.S.-regulated binary options

exchange. Nadex offers a range of expiration opportunities (hourly, daily, weekly) that allow traders to take a position based on market developments. The choice is vast. Indeed, there are over 2,400 binary option contracts each day. These range from popular currency pairs (such as GBP/USD) to key commodities like gold and oil. Members' funds are held in a segregated U.S. bank account in accordance with CFTC regulations, adding an extra layer of security.

Check the implicit transaction costs of a binary option.Binary options brokers do not charge

any per-trade fees, nor do they collect any commissions.

Understand the percentages.What percentage of the time would you have

to be correct in order to profit from the binary option you are contemplating?

Know the terms.How different are the terms (for instance,

"strike price") on one side of the trade compared to the reverse side? If they are significantly different, the buyer would be forced into the unusual position of having to predict the magnitude as well as the direction of a price movement.

Know the transaction costs ahead of time.It is extremely rare and difficult to

outperform the market consistently. That means that options traders typically have to engage in many transactions in order to wind up with a profitable position. Consequently, a trader faces the possibility of high transaction costs and lower profits.