Binary Options are digital contracts that are placed online with a dedicated Binary Options Broker. They allow fast profits to be made by speculating on the outcome of the price movements of selected financial assets.
While these contracts have many benefits, one of their chief attractions is their simplicity. No direct investment is made in the asset itself, which allows the broker to offer simple wagers on the price movements of an asset, for which the trader will receive an agreed payout if correct.
Contracts are placed over an agreed period of time which is set at the time of purchase. A fixed investment amount is placed on the outcome and a potential return is provided. Provided that the original contract obligations are met at the agreed expiry, a profit is made on the contract. This is referred to as ending ‘in the money.’ Alternatively a contract can end ‘out of the money’ and no payout is made.
For this reason Binary Options are often referred to as ‘all or nothing’ investments; you either pocket the return or forfeit your investment at the conclusion of the contract. It is however the simplicity of this trading that has won Binary options many supporters. In particular many people like the transparency associated with this approach to financial trading, together with the potentially high rewards on offer.
Since they were first launched to the retail market, the number of contracts and outcomes that it is possible to trade has grown. Many of the advances have mimicked the more complicated contracts found in the Futures and Options markets. These allow traders to profit from specific pricing moves or range bound pricing.
It is however the original Call and Put style contracts that continue to prove the most popularly traded contracts. These are sometimes also referred to ‘Higher’ or ‘Lower’ contracts for the way in which they operate.
- The Call Contract – This contract pays out if the price ends higher than the entry price. You would use this contract if you think that the price of the asset will rise by the point of expiry.
- The Put Contract – This contract pays out if the price ends lower than the entry price. You would use this contract if you think that the price of the asset will fall by the point of expiry.
With these two contract types you can speculate on the price movements of financial assets in both rising and falling markets. This provides much greater flexibility than many traditional long only investment strategies.
Let’s assume the S&P 500 has been rising strongly over the past couple of sessions to now stand at 1750. New economic figures are released that generally positive and you think that this will accelerate this latest move up towards the 1800 level by the end of the day.
You purchase a Call contract from your broker at the start of the session to expire at the end of the trading day. At the time of purchase the Index stands at 1752. To profit from the contract you need it to be higher than this level at the end of the trading session when the contract expires to receive a payout from the broker.
So what return would you receive? Well this would be dependent upon the exact contract you place and your broker. It would however be agreed at the outset of the contract, allowing you to work out your potential risk and reward. You will be offered a fixed percentage return on your investment of between 65-95%.
The profit that you make on each contract will be dependent upon what you are offered as a payout percentage when placing the contract. Typically you will be offered a return in the range of 65-90%. This makes Binary Options not only an exciting but potentially lucrative way in which to play the financial markets.