Binary Options share some similarities with standard options, being one of them the fact that in order to make a profit from your contract you need it to be in the money by the time of expiration (unless of course you get a sudden and significant movement in price before expiration).
This means that like standard options also have a strike price which determines whether you are in or out of the money.
However, when you trade standard options your profits will depend greatly on how far near or in the money is your contract based on its strike price, so for instance, if you purchased and IBM November CALL option at the $130 strike when the stock was at $128.35 per share, you would have to invest $330 to purchase 1 contract and you would need the stock to go all the way to $133.30 just to break even, and believe it or not, a $5 movement in the price of a stock is a very significant increase, even for company that is trading above $100 per share.
Binary Options on the other hand allow you to invest as little as $30 in a contract and they do not require that the price takes you all the way to a $5 increase so you can make a profit, in fact, when trading these instruments you are an absolute winner just by being 1 cent in the money or an absolute loser if you are out of the money by the same amount.
This is what defines the very nature of binary options, because upon buying a exotic, or binary option, contract you either win or lose, but you will not do just fine if you win, nor will you just take a small hit if you lose, no, you will either score big or lose big, it is “all or nothing”.
Indeed, when your exotic, or binary option, contract expires in the money your return is anywhere around 65%-81% depending on the underlying asset, and these instruments are usually traded hourly, meaning that they expire not in a month (like standard options do) but within the hour.
This means that you can make 65%-81% of your investment in 1 hour, or you can lose up to 95% of your investment also in 1 hour.
Now, does this mean that binary options are too risky?
Well no, if you manage your risk and your money adequately you can achieve returns way beyond what you could expect within traditional options, without the need for your to be reckless.
What does it mean to manage your risk?
It means that if you have $2,000 you cannot buy a exotic, or binary option, contract worth the same amount, because if you lose you will wipe out your account in a single trade, which will leave you without the very thing you need to make up for your loses: trading capital.
Of course, if you win you might end up with $3,620 as well, but believe me, that is how you lose money and not how you make it.
A good risk and money management ideally involves limiting your risk to about 1%-3% of your account, because that way if you lose 1 or 2 or even 10 trades in a row -which is always possible- sure you will have taken a hit, but you will still be in the game, just like a good poker player.
So as long as you do not go crazy trying to get rich in one day with binary options you will not only be fine, you will be great, because the profit potential is just huge and the whole process of trading these instruments is a lot simpler because of what I explained before (you only need to be 1 cent in the money or less to get paid 65%-81% of your investment, which means that you only have to find the price direction, which is a lot easier).
Now, why do these instruments pay so much even if you are only a cent in the money? Well, this is due to the very nature of these type of option contracts, you either get it all or you get nothing, which is why the returns on these instruments are fixed and they go from 65%-81% depending on the underlying asset of the contract.
This means that as long as the condition is realized (in this case that the price of the underlying asset closes at least $0.001 above the strike price -if it is a CALL option- or below the strike price -if it is a PUT option-) you will get paid the fixed return for that particular contract.
So, to conclude this quick look at binary options, you should take note of the following:
A exotic option, or binary option, generally trades in 1 hour periods The return of a exotic option, or binary option, is around 65%-81 at the time of expiration Your trade is a winning trade as long as your contract ends up in the money by at least $0.001
The only “secret” to be profitable trading binary options is to have good sense of the direction in price, because remember, you really do not have to be right about the magnitude of the movement, you only need the price to move in the direction you anticipated.
If you have yet to start trading binary options, make sure you get my FREE trading package so you gain the necessary know-how to easily find price direction and manage your money wisely. There is really nothing more to it.
