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Binary Options 101

TradingPub Admin | January 21, 2013

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Interested in putting your predictions to the test? One way you can do this is to trade binary options, financial instruments that allow you to bet on whether the price of a particular asset will rise or fall in value.

Binary Options - Basics
Binary options allow you to make a wager that the price of a security will open or close trading either higher than or lower than a specific price. If you manage to bet correctly, you will receive the payout amount. If you fail to predict correctly, you will not be given anything for your wager.

All of these binary options have a specific expiration date and the amount you make as a result of the transaction is dependent on the final price of the contract when this period expires.

Trading Binary Options

The factor that sets apart binary options apart from regular options is that if you buy one of these securities, you can generate a high return if the contracts end up "in the money." However, the alternative involves you losing 100 percent of your principal.

The resulting profits and losses that can be gained are known at the beginning, and these are calculated by how much the contract owner invests.

'In The Money'
An option is "in the money" if the investor's bet is correct. A call option is "in the money" if the security is above the strike price when the contract expires. A put option is "in the money" if the security is less than the strike price when the contract expires.

Three Aspects of Trading
There are three aspects that are crucial to trading binary options contracts - there is the underlying asset, the expiry time and the direction that the asset is predicted to move in. The underlying asset is the security that is being traded, for example a stock, bond or commodity. The expiry time is the predetermined window that defines the expiry of the asset. The direction is whether or not the asset will rise (call option) or fall (put option).

The option buyer will purchase a call option if he predicts the asset will be worth more than the strike price by the expiry time. Alternatively, he will buy the put option if he expects the asset to be worth less than the strike price when the expiry time is reached.

The ability to use these instruments to bet that asset prices will either rise or fall makes binary options trading a flexible form of trading. A person who trades one of these securities is able to choose the asset they want to bet on, the direction they predict the asset will move in and and expiry time. Since engaging in these contracts involves fixed returns, the trader is aware of how much he can either gain or lose.

Ease of Trade
The ease of trading binary options has increased substantially in recent years. In previous times, investors needed to work through a specialized broker and pay substantial fees for such a service.

However, these transactions are now done through the web. They do not require the investor to purchase or download any special software. If you want to trade binary options, you can gain trade a wide range of assets and have your trades settled very quickly.

If you want to learn more about trading these instruments, you can obtain quality options trading education through TradingPub, which gives you the opportunity to interact with some of the top traders and investors in the industry.