Binary options trading is a fascinating concept that allows anyone to invest in option markets without a large cash outlay. It is popular because of its fast turnaround between buying and selling and its high profit margin.
Technically, a binary option is a contract which nominally gives the owner the right to buy a certain asset at the end of a fixed period of time. In reality, the owner of the contract does not want to buy the asset; he is speculating on whether the item under contract will gain or lose value at the end of the specified period.
As with any market trading, there are risks involved and an investor should never put more money in it than he can afford to lose. However, there is also a potential to make a lot of profit quickly off of the money invested and that is what has attracted the attention of so many people. This has become such a large part of the investment market that brokerage houses have been established to handle
options trading exclusively.
The buyer may choose what item, or “underlying asset” he wants to contract to purchase. These items are usually currencies, commodities, stocks, or indices.
It is also up to the buyer how much time he wants to wait before the contract expires. This is known as the “expiry time”. A one-hour expiry time has become standard but the owner can choose a day, week, or month.
In the contract, the buyer declares whether he believes the underlying assets will go up or down in value at the end of the expiry time. The owner places a “call” option on the assets he thinks will rise in value and a “put” option on the items he thinks will decline.
The owner doesn't have to know how much an item will rise or fall. It must simply have moved in the direction he predicted by the end of the expiry time in order for him to sell his contract back to the broker for a price they agreed upon. This is usually at a profit of 60 to 70%.
If the owner's prediction is incorrect, then the broker still buys the contract back but this time at a lower price than the owner originally invested. Since the agreed-upon price is usually around 15% of the purchase price, the owner does not lose all of his investment.
The following story may demonstrate why the binary market is popular:
Sam and Joe are both amateur investors in the stock market. They don't have time to study every major business in depth, but they have both found the same company that they feel will do well in the years to come.
As it turns out they are right. Joe buys a few shares of stock, and his stock slowly climbs in value. After only five years, his stock has doubled in value and he sells, pleased to make a 100% profit.
Sam decides to invest in
binary options. He buys a new contract every day on that same company. The first day Sam buys a contract, the company's stock moves up incrementally. Joe has made a penny. Sam has made a 70% return on his investment. As the years go by, the company's stock goes up and down, but generally trends upward. Sometimes Sam loses money, but most of the time he gains.
Because he is buying and selling daily, Sam is keenly interested in his favorite company. He reads about it. When the company vice-president dies suddenly of a heart attack, Sam buys a put contract the next day, correctly predicting a slight decline in the value of the stock. Joe has bought the stock and set it aside, he isn't even aware of the death of the vice-president.
At the end of five years, Joe has doubled his money and is entirely divested of the company. Sam, on the other hand, has made five times as much. Some days he made mistakes and lost, but for Sam that five years were exciting and rewarding. He has become an expert on the company and has no intention of stopping his daily binary options trading.
It is no wonder binary options have become so popular.
Online trading traders are available to help anyone get started..