What Is Binary Options Trade
Binary is a term related to computers, signifying that there are only two digits that are used and understood by the computers for all the information and instructions. These two digits are zero and one. Relating this term to the trading or financial world, the binary options are options that allow the traders to speculate on the price movement of certain securities like stocks, indices, currency pairs or commodities. Since these are binary options, the trade outcome of these has only two possible outcomes, loss or gain, zero or one.
Binary options trade thus, allows the traders to simply speculate the price movement of the chosen security in relation to its current level. The payoff in the case of binary options trade is predetermined and is paid on the condition of fulfillment of the contract ending “in the money”. If the contract ends “in the money”, the trader gets the predetermined amount but if the contract ends “out of money”, he gets nothing. Thus the simplest form of binary options trade is also called, “all-or-nothing”, since the payout is either all or nothing.
How to trade binary options
The traders have only to speculate the price movement. This can be done by purchasing the “Call” option or the “Put” option. The “call” option is purchased when the trader speculates the price of the underlying asset to move upwards in the future, by a date as set in the contract. If the trader speculates the price of the underlying asset to fall in the future, beyond its current level, then he purchases a “put” option. At the time of expiry of the contract as per the expiration date in the contract the option is checked for the price level. If the speculation of the trader is correct, then he receives the predetermined fixed amount. However, if his speculation is incorrect, he gets nothing.
The payout in the case of binary options trade is fixed and therefore the risk is limited. In case of a positive ending of the contract, the trader gets the fixed amount that has been predetermined. But in case of a negative ending, the trader does not lose anything beyond the amount that he had spent on purchasing the option, called the premium. This is an important feature of binary options trade.
Here it is also important to remember that the contract of a binary options is considered “in the money”, even if the price has moved over or fallen beyond even by a single tick. This means the traders’ speculation must be correct as related to the direction only. They need not be correct on the magnitude of the change in price. Again this is important since traders can benefit largely from this particular feature.
Though binary options are simple and easy to trade, a new entrant to the financial market should always lay emphasis on research and analysis before taking to trading. He should closely observe the strategies and tips followed by traders so as to learn the nuances of the trade and develop strategies of his own.