How to Trade Binary Options

Before you can start to trade Binary Options you will of course need to understand what exactly they are and how they work. A Binary Option is a Financial Instrument which can be a little difficult to understand at first if you have never come across them before however we shall now show you how they work and how to trade them.

Have a look at binaryoptionsexplained.com for video tutorial to learn how to trade binary options.

The payoff from a Binary Option can be an asset, a fixed amount or even nothing physical at all. This means there are in fact two main types of Binary Option with the first being what is known as cash or nothing type of Binary Options or it could be an asset or nothing Binary Option.

  • Cash or Nothing Binary Option – When your trade is a Cash or Nothing Binary Option then this can pay a set in stone type of fixed amount of cash (or possibly nothing at all) should the Binary Option expire at a stage known as in the money.
  • Asset or Nothing Binary Option – This type of Binary Option will either return nothing or the value of the security asset when the option expires.

The reason these types of options are called Binary is simply that there are only two possible outcomes which can be derived by trading in them. You will often find various other names associated with Binary Options and these include Digital Options and Fixed Return Options, with the former being commonly associated with currency trading and interest rate market type deal and the latter usually associated with the American Stock Market.

If you wish to trade Binary Options then you will need to understand before you start to trade that the potential return or your potential profit is known before you purchase them, and this is why they are proving to be popular with investors and traders who like the fixed potential profit structure they can and do offer.

When you purchase a Binary Option you are, for all intents and purposes guessing or predicting the way in which any financial product is going to move, obviously any financial product can increase or decrease in value and this is all you are faced with doing, simply predicting which way they will move over a set period of time, which can be minutes, hours or in fact any length of time.

  • Call or Up Option – By taking what is known as a Call or Up Option you are predicting the financial product, whatever it is, is going to increase in value at the end of the allocated time period.
  • Put or Down Option – The Put or Down Option is of course the opposing view of the above Option and as such you are hoping the value of the financial product decreases in value at the end of the allocated time period.

One rule of purchasing Binary options is that once an investor has purchased one of them they are cannot then be resold at any time until the allocated time period for the trade has matured and been reached.

Binary Options – An Example of a Trade

You could compare trading in Binary Options to a horse race or in fact any type of betting proposition, as at both sides of the trade you have two people with opposing views. At the end of the race or in this case the Trade one person is going to win and one is going to lose.

So you can fully understand the workings of a Binary Options Trade let us give you an example of one in action, in our example we will base the option around a currency exchange of Forex related deal based around the price of Euros versus US Dollars.

Trader A is convinced that the rate of the Euro against the US Dollar is going to close at 2:00PM at a value of 1.25 or greater, so with this in mind he then purchases a Call Option, the risk involved or the amount of money he stands to lose if his prediction is incorrect is the price of the option which in our example we shall say is $40.

The potential gross profit for the trader, if the price of the Euro against the US Dollar increases is $100 less the cost of the Option which is $40 so he stands to make a $60 profit on each Call Option he has purchased if the price of the Euro against the Dollar moves higher than 1.25.

Binary Options – Making a Profit

As you can see from the above guide, to make a profit when dealing in Binary Options you simply have to predict whether the price of any financial type instrument or asset is going to rise or fall in price over a set period of time, and then place a trade on your prediction.