It is no secret that the Forex market can be a very profitable place to be if you want to make money by trading currencies. However, it is also no secret that achieving consistency within the Forex market requires a lot of preparation (you need education and reliable trading tools) because not only you need to have a good idea of where the price is about to move, but also how far it is going to go.
For instance if you are trading the EUR/USD pair and you decide it is a good idea to go long, you would place a “buy” order, because you are expecting the price of the Euro against the dollar to go up.
If you placed your trade using 1 mini lot (this equals $1 profit for every pip), and your target for that trade is 30 pips, you would need to have at least $1,000 in your account to meet margin requirements and allow some room for drawdown, and if the trade is successful you will make $30 in profits.
However, in order for this to happen the price of the Euro has to move 30 pips against the dollar, otherwise you will not reach the intended target and realize the profits. As you can see, if you trade the Forex market using the traditional approach you will have not only to predict where the price is going, but also how far it is going, which simply makes it twice as difficult.
Now, if you have $1,000 in a binary options trading account, what would you need in order to place a successful trade, and moreover, what kind of profits a successful trade would deliver for you?
In order to answer this question, let us assume that the price of the EUR/USD is at 1.47849 and based a given analysis of the market (e.g. swing trading pattern recognition) you think that the Euro is trending up against the Dollar.
In this case you would go long as well, but instead of placing a “buy” order for currency, you would simply buy a $100 call option for the EUR/USD pair with a 1 hour expiration. If you are right and the price goes up, even if it is only 0.001 pip above the price you purchased your call option (which is the strike price), and it remains there or above until expiration, you would get as much as 75% return on your $100 investment.
In other words, a single $100 trade could easily deliver $75 in profits and you could repeat this process several times during the day.
But the remarkable thing here is that you did not need the price to go up 30 pips in 1 hour to get a 75% return on your investment, you only needed 0.001 points of variation to achieve this.
In this scenario you certainly had to determine in what direction the price was going to move (this is usually an ingredient of the trading process) BUT your forecast did not have to take you all the way to a 30 pips increase in the price in order for you to make get the expected return, because you got it with just 0.001 points of variation, and you made $75 instead of $30.
Also, you can open a binary options account with only $100 and you can trade with as little as $30 with no commissions charges.
So as you can see, the potential of Forex trading through binary options is huge and the process is far simpler thus increasing your chances for profitable trades, however, you do need to have a sense of where the market is going. Provided that you have this, you are likely to make take far more winning trades than losing ones and a lot more money as well.
Binary Options are options that pay either a fixed amount or nothing depending on whether or not a certain condition is fulfilled when the option expires. This is unlike a regular option whose payoff is dependent on the price of the underlying asset relative to its strike price. For example: A binary option on weather would pay out a fixed amount if the temperature exceeds a threshold. Binary option are usually structured as European options — i.e. the holder of the option is only paid if the underlying condition is reached upon maturity. However, there are American styled binary options which are automatically exercised (i.e. pays out) as soon as the price of the underlying asset equals the strike price.
The strike price for binary option is the main determinant of the pay out. For instance, a binary call option on oil with a strike price of $80 and payout of $100,000 would pay the holder $100,000 if the price of oil upon expiration is $80 or more. Binary options are mainly traded over the counter, however, the CBOE offers binary options on S&P 500 and VIX which traded on an exchange. Option trading websites such as HedgeStreet have also made these options more accessible to retail investors. On the other hand, most casino games and bets with bookies are technically binary options. Many insurance contracts are also designed to be binary options.
There are two popular types of binary options: cash-or-nothing options and asset-or-nothing options. With a cash-or-nothing option the holder is paid a fixed amount of money if the option is in-the-money upon expiration. An asset-or-nothing option pays the holder the value of the underlying asset if the option expires in-the-money.
Binary options trading can be defined as the trading in which the buyer enters into an agreement or rather a contract to purchase an asset at a fixed price and at a fixed pre-determined time in the future. Here it is important to note that the trader does not buy the asset but has the option of buying it at a future date. The price which is fixed for the trader at which the owner of the asset may buy or sell is called the strike price… With the advent of the internet it is now possible to go in for online binary options trading. This has become highly advantageous for those traders who can now trade from the comforts of their homes and also for those individuals who because of some constraints could not move out.
The online binary options trading basis on which trades are done are based on two possible outcomes of the trade which could be a potential gain or loss. A gain is made when the option expires “in-the-money” and the trader gets nearly 60-75% payout, whereas if the option expires “out-of-the-money” the trader gets nothing. There are three important aspects to the binary options trading and these are: • The underlying asset which is being traded: This could any item from a range of products like currencies, stocks, commodities or indices. • The expiry time: this is pre-determined time when the trade is destined to end. The expiration time could be the end of the hour, the end of the day, the end of the week or the end of the month. • The direction of the asset movement: the movement of an asset can be up which is known as the call option or the down which is called the put option. A call is purchased if the trader thinks that the asset will be above the strike price at the expiry time. Where as he places a put option if thinks that the price of the asset would be below the strike price at the time of the expiry.
These factors make the binary options trading a flexible trading medium. In the binary options trading the buyer has the control over the asset, the predicted asset direction and the expiry time. As the returns of the trading are fixed, the traders are aware of their potential loss or gain on a trade and wait only to see the movement of the direction of the asset.
Anyoption is a new online binary options trading basis on which online trade can be made by private and institutional investors all over the world. Being totally web based it is highly recommended for those who choose online binary options trading. The software does not need any download or any previous trading experience. Being self explanatory and relatively easy to use, it is quite liked by the online traders. The interface offers a wide range of assets that are offered as options for trade and the accuracy and speed of the trades is simply flawless. For the complete satisfaction of the traders, the most advanced and stable technologies have been introduced into the interface and they ensure complete safety and stability.
Cause of the popularity of binary options trading:
The options buyer is aware of the risks involved in the trade. It is controlled and known to the buyer and hence even if his trade expires “out-of-the-money”, he still makes 15% of his investment amount.
Binary option trading does not require deep knowledge of the trading arena as he must only understand the direction of an asset as the magnitude of the movement of the asset is immaterial.
Even an incremental increase in the price of the asset can bring profit for the buyer as the trade would fall “in-the-money”.
Being very flexible in nature with regard to the selection of the asset, the expiry time and the price direction of the asset, the binary options trading can be made suitable for any trader.
Different types of binary options The online binary options trading basis on which the various types of binary options are differentiated are factors other than the price and expiration date. These refer to conditional scenarios and if they come true, the option is either validated or invalidated. The trader fixes the predetermined payout amount in case of the validation of the scenario. On this basis there are the following different types of binary options:
One touch: here the trader sets that if a particular currency trades at a specified rate, then he would receive the predetermined amount of profit.
No touch: under this option the trader specifies his condition that if a currency does not reach a specified target before a specified time, he would make profits.
Double one touch: under this type of trade, the trader makes two triggers or targets and makes profits if either of them is hit. Such type of trade is generally used when there are highly volatile market conditions and the traders are unaware of the direction of the movement.
Double no touch: the opposite of double one touch, in this type of trade options are bought as the markets are range bound and there is relatively less volatility.
Digital Options: digital option is also known by the name of binary options where the outcome of a trade has only two possibilities, either a full predetermined amount in case of the trade being “in the money” or nothing in case of the trade being “out of money”.
Exotic options can be defined as those options that have a certain clause added to them which state that the option would be only active until the stock hits a specified price. Else the exotic option lies worthless. It is different from the common European or American options in terms of the underlying asset or the calculation of when and how the trader would receive the predetermined payout. The exotic options are generally traded over the counter as they are more complex than the options that are traded on an exchange. The exotic option strategies are best suited to those traders who want more flexibility in their trading. The different types of exotic options are:
• Barrier options • Asian options • Compound options • Bermuda options • Himalaya options • Chooser options • Digital options
The differences between the digital options and exotic options are as follows: 1. Simplicity: the digital options are simple to understand and operate. On the other hand the exotic options are complex and not very simple to operate. 2. Place of trade: the digital options are simple to trade and are generally traded on stock exchanges whereas the complex exotic options are traded over the counter. 3. Not for individual traders: the exotic options are complex options which are the tools of the multi million dollar traders who are backed by big financial institutions and banks. They are not traded by individual traders because of the complexity. On the other hand, the digital options are traded by individual traders. 4. Expense and liquidity: the digital options are less expensive and more liquid than the exotic options which are expensive and illiquid. Because of this they are not traded by individual traders.
These are the main differences between digital options and exotic options, however digital options is a part of exotic options. But due to the complex nature of the exotic options they are generally not traded by individual traders but by traders who have the backing of big banks and financial institutions. Therefore it depends on traders to adopt various strategies to trade profitably and employ various options available under these options.
American Binary Options
American options vs. European Options Option trading is dependent on more factors and variables than stock trading hence traders have to acquaint themselves with all these factors. Although they are aware of the call and put options they are not familiar with the option styles available. There are basically two options styles, that is, the American option and the European options.
Most investors are generally acquainted with the American options where the trading can be exercised any time before the expiration date. Trading on stocks like General Electric, Apple and Google are examples of American style options.
European style options are less common than their American counterparts and are hence less familiar to traders. Trading options on stock indices like the NASDAQ, the S & P 500 and on currency pairs like the U.S. Dollar vs. the Euro is trading the European style options. Here the trading can be exercised only at the expiration and not before.
However both the option styles have the following common characteristics: • Have a strike price • They are traded on exchanges • Have a set expiration date • Use similar structures for ticker symbols
Thus although both the options have some common characteristics, the significant difference between the two is the time when either of them can be exercised. This difference basically results in the price of the option. The European style being fixed to be exercised at expiration is assuming less risk and therefore the trader charges a lower premium. On the other hand, the American style option trader can exercise trading any time before the expiration thus assuming greater risk and hence charges a higher risk premium and raising the price of the option.
Vanilla Options
Binary Option vs. Vanilla Option A binary option which is also known as digitals for the fact that they offer only two outcomes of a trade are quite different from the standard vanilla option. Trading in binary option has the payoffs to be a fixed predetermined amount which is paid on the correct prediction of the price movement at the time of expiry.
On the other hand a vanilla option is the standard form of trading where there is an expiration date and a strike price and has the most standard features.
Differences between binary and vanilla option
Payout profile: the major difference between the two is the payout profile. The binary option payout is a fixed amount that is predetermined at the time of signing the trade contract and if the trade is “in the money” this predetermined amount is paid to the trader. On the other hand, the vanilla option payout is not fixed and if on expiry the trade is “in the money”, the payout depends on the difference by which the traded instrument clears the strike price.
Trading patterns: in the U.S. a binary options is also traded on inflation figures such as the producer price index and the consumer price index. The figures for these indices are often based on independent sampling methods and are revised frequently. Whereas without the availability of continuous prices it is very difficult to trade vanilla options both in the American and European option styles.
Out of the money purchase: if a trader intends to purchase an “out of the money” binary option he would find it cheaper in comparison to an “out of the money” vanilla option purchase with the assumption that the strike price and the expiry time is the same. The difference is there because the binary option pays a fixed amount on the trade being “in the money” whereas the vanilla option theoretically pays an infinite amount.
Moving from out to in: the movement of a binary option from being “out of the money” to “in the money” is quite rapid as compared to the value movement in a vanilla option.
These are the major differences between the binary option and the vanilla option. However both the options have the similarity of no payment in case the trade stands out of the money at the time of expiration. Therefore with the differences given above the binary options trading is considered less risky than the standard vanilla option trading.
In short, binary options traders are investors who are: Tech savvy and sophisticated currencies speculators wanting to profit from the market. Investors who wants to profit from direction of the market fluctuations.
Commodities investors who want to quantify and hedge their risks from server fluctuations. Financial institutions who wish against unexpected fluctuations in interest rates or currencies rates.
Binary Options Exchanges
Binary options are immensely popular among the Europeans. They can be traded on the U.S. Futures Exchange (USFE), the Chicago Board of Trade (CBOT) which offers trading on Fed Funds Rate. To trade in these instruments, one has to be a member of these exchanges or need to trade through a member of the exchanges.
Conclusion: To conclude, binary options: • Are normally traded in one hour time frame. • Returns are between 65 to 81 percent at the moment of expiration. • Returns are paid out in full even though the movement is just one tick in the money. • The extent or magnitude of fluctuations is not a factor in decide whether to invest in the market or not. Traders only need to be aware what direction the market will be heading to in order to make their investment decisions.
Despite its seeming simplicity, trading binary options online is a high risk investment venture. Traders who are new to options trading are recommended to educate themselves properly first before embarking into this market. In addition, traders should only trade with capital that they can afford and not use their savings or income to risk in this highly charged trading environment. Where do you trade binary options?
Where To Trade Binary Options
Typically, binary options are traded on the “Over the Counter” (OTC) markets by large financial institutions, hedge funds and other corporate entities. Their underlying assets are normally commodities, events, currencies, interest rates or index.
For example, Binary options are extremely popular in the platinum market. Their call and put prices are struck based on the mid price of the market for the platinum of a certain grade that is quoted by a group of dealers in this commodity over a given period. The market for this metal is large as it is not only traded among producers and manufacturers, but also among market dealers and speculators.
The prices for this commodity are determined by different parties and with no fixed frequency. In addition, the price is not confined to a particular exchange. Normally to seal the deal, traders also use a third party calculation agent to determine an impartial price obtained through sampling different dealers on the expiration date.
Because the smooth production and flow of commodities are subjected to unforeseen factors like weather events, binary options are the perfect tool to hedge risks that are tied to these unpredictable events. With binary options, the option writer (option seller) will undertake to assume some of these risks by giving a quantifiable risk that is linked to an unpredictable weather event. An impartial third party like a government weather bureau is usually used to determine whether such an event has occurred.
In addition for hedging against unpredictable events like adverse weather, binary options are also used for protection against inflation. Because inflation is based on key economic indicators like Consumer Price Index (CPI) or Producer Price Index (PPI) which are published infrequently, it is extremely difficult to mark-to-market traditional options whose values are dependent volatility and a continuous stream of price data. With binary options, a buyer is able to obtain some measure of protection in the event the inflation rate drops or jumps all of a sudden.
Lastly, binary options are very popular in the Forex market, particularly for volatile or illiquid exotic currencies like the Thai Baht or Turkish Lira. Some emerging economies currencies are highly susceptible to sudden “jump risk” due to economic or political instability or simply illiquid due to the small volume of international trade that the country has. Normally, currency speculators will borrow the developed economies currencies like the US dollar or Euro which are lower in interest rates to speculate in the higher rate emerging economies currencies. By using binary options, these speculators can hedge against “jump risk” while getting to earn “carry”. Binary Options advantages vs. traditional options
Simplicity:
Because a trader only needs to know if a price is going up or down, he no longer has to be concerned about the magnitude of the fluctuation. For traditional options, on the other hand, a trader is required not only to know what direction prices will move but also the extent of the movements before he can safely say that the trade he made will be profitable.
Managed Risk:
As the payout for a binary option is already predetermined at the time of acquisition, this means the risk and reward ratio is a known factor. With regards to traditional options, the risk and reward ration have no predefined boundaries and thus a trader can encounter unlimited losses or gains.
Higher than proportional returns when compared against the price movements Compared to traditional options, the payout for binary option is not proportionate to the magnitude of its price movements. A movement of just one tick in the money is already adequate to for a trader to collect the entire predetermined payoff amount. With traditional options, how much a trader is paid off in the money will always be proportionate to the magnitude of the price movements.
Quick Turnaround for Settlement
Binary options are short term contracts which are settled hourly or daily. Hence, this allows a trader to maximize his trading opportunities and trading capital. In addition, a trader will also be able to grow his trading capital exponentially.
Sophisticated Trading Despite being much simpler to deal with than traditional options, a binary option trader can apply almost all the trading and hedging strategies that are available to a trader when he is dealing with traditional options.
Forex Binary Options Broker I had trouble finding a forex binary options broker online, but now I can trade binary options on most of the major forex cross rates I want, whether it’s Dollar/Euro, or Yen/Dollar, or Dollar/Pound. I am very pleased with the informative articles at the trading binary options as well.
Trades are done with zero commission, zero spread.
Trading foreign currency is done either by automated systems or by highly capitalized institutions and super-hedge funds – both of whom aim to wipe out smaller players the way kids stomp on an ant-hill. Not so in the binary options arena where trade sizes are fixed and small.
Trade Binary Options on Any of the Following Forex Cross Rates
Here are the currently trading forex binary options at my broker: • Yen/Pound • Yen/US Dollar • Yen/Euro • Australian Dollar/US Dollar • US Dollar/Canadian Dollar • Euro/US Dollar • US Dollar/Pound • US Dollar/Swiss Franc Any of the above forex option cross rates can be currently traded commission free.
Other Binary Options Trading – Stocks, Indices, and Foreign Stocks
Other securities on which binary options are presently trading include securities and indices such as: • BMW • DAX Index • Volkswagon • Siemens • Google • General Electric • Microsoft • Nasdaq Index
These stocks plus several other well known, highly liquid securities are trading on the binary options exchange every day. Nearly all the binary options have both an hourly expiry binary option or an end of day expiry binary option. Having the options turn over on such short durations makes for a really fast way to make money trading options. Given the way stocks have performed over the last decade plus is it any wonder people are drastically reducing their holding period risk? It’s plainly obvious to me. The way to trade in markets like these is to put yourself in a position to play both sides of the market – i.e. put and call or long and short. If you can’t play the put side of an option trade then you have significant exposure to market downturns…. again, do we need to go over the performance of the market of the last decade again? Good… I didn’t think so.
Binary Options Trading is Cheap!
It’s cheap and easy to open a binary options trading account. One broker charges no commissions on trades and it only takes a hundred bucks to open an account. Last I looked they were even offering a bonus of $100 on a $500 initial deposit. How cool is that when they give you a hundred bucks just for trading with them? From what I understand the bonus cash is still available and can be applicable to new *deposits* as well – not just new *accounts* – so keep your eyes peeled for opportunities like that. Trading with other people’s bonus money is a great way to get your feet wet and learn how to trade with a forex binary option broker.
Find a Forex Binary Option Broker Today
I hope you find great success trading binary options and or forex binary options. It’s quite a bit simpler than your standard options and the yields are still fantastic (60%-75% on the most liquid securities).
