Binary Options Education
Binary Options Education
Welcome to our education section. Here youll be able to learn about the binary options market and how to trade binary options like a professional. You can read articles about the different trade types, as well as individual lessons on trading indices, stocks and using technical indicators. [See all our lesson modules in right hand sidebar]
So lets start off with the basics; what exactly are binary options?
What are binary options?
Binary options, also known as digital options or fixed-return options, are a special type of option where the payoff is either a fixed amount of an asset, or nothing at all. The most popular assets traded in the industry include indices, stocks, commodities (e. g. gold and oil) and Forex.
There are a number of different types of binary options trades, including the popular high/low trade. touch/no touch. target bet. and the ladder bet. You can learn more about each of these types of trades by clicking on the links, but first lets talk about the structure of the binary options market and how you can make money from it.
The Structure of the Binary Options Market
Binary Options Call & Put / Over & Under
The binary options marketplace is a relatively new financial market. The market was deregulated in 2008 to make it open and accessible to retail traders. In this market, the way profits are made is a bit different from the other markets. Instead of profits being earned solely by the asset moving the trader’s favour by a number of pips, there are several ways money is made in this market. The end point is that the trader gets a payout which is made up of the invested capital and the profits from the trade. Not only must the trader be able to predict trade outcomes, he must be able to do this within the time allotted for the trade.
In the binary options market, we have the following participants:
a) The dealers/brokers, whose job is to match buyers and sellers of the two opposing sides of a trade contract. Notice that in this market, we do not speak strictly of buyers and sellers, because no assets are exchanged. It is the contracts based on the price and behavior of the assets that are traded. The dealers make money on commissions charged on the trades from both sets of traders.
b) The traders. Traders are split into two camps: those on one side of the transaction, and those on the other side of the transaction. Traders on one side make money and are paid from the money committed and lost by those on the other side.
The balance of payments in the market is such that there are always more losers than winners, so payment of the winnings to successful traders should NEVER be a problem. When traders start having withdrawal issues with brokers, then something else is going on. It is important for all players in the market to understand how the market works. It pays to know a little about a financial market you are committing your money to.
Binary Options Trade Types/Components
The binary options market is not based solely on buying and selling of assets, but rather on buying contracts that predict the behavior of assets in certain ways. For instance, there are trades that predict whether an asset will range-trade or break out of a price range, move up or down, or reach a price milestone or not. The following trade contracts are traded on the binary options market:
a) High/Low (also called Up/Down, Above/Below or Call/Put options): These are the contracts that trade on whether an asset will end higher or lower than a reference price point that may be the market price or a price chosen by the trader.
b) 60 seconds . These are the same as (a), but have a very short time limit of 60 seconds.
c) In/Out: Want to make money on whether an asset will trade in a range of prices or breakout of this range within a time period? This is the trade of choice. It is also called the tunnel trade, range option or boundary option.
d) High Yield options: These mimic some of these aforementioned trade types. The hallmark of these options is that they give traders difficult targets to achieve, but promise very high payouts of up to 400% or eve 500%, depending on the broker used.
e) Touch/No Touch: It is fun to watch prices aim to achieve price milestones. They can either touch a price level, or fail to reach that level. This is for traders to decide with the Touch/No Touch option.
A unique feature of the binary options market is that trades are timed. It is almost like an exam where the trader is hoping to write enough to pass. Sometimes the broker sets the time for the trade to end, and sometimes the trader has the opportunity to time himself.
How Money is Made in Binary Options
Money in the binary options market is a function of the following:
a) The invested amount.
b) The payout for the trade.
The invested amount is the money the trader uses in buying the trade contract. The trader is at liberty to decide how much he will use to purchase the trade contract. However, it is always advisable to use good risk management by not committing too much into a trade.
Payouts are sometimes determined by the brokers by default. Some platforms will however, adjust the default payout according to the expiry time of the trade, expected outcome of the trade, and difficult level in terms of how possible it is for the trade contract to perform according to the trader’s setting.
This is a brief summary of how binary options work. If you have read this thoroughly, you should be able to understand how the market works and use it to your advantage.
Hamish Raws Advanced Binary Options Strategies and Greeks
BinaryOptions has an encyclopaedia of advanced binary options written here. These strategies and articles were written and developed by Hamish Raw, founder of BinaryOptions and the author of Binary Options: Fixed Odds Financial Bets. Advanced traders can read a range of advanced binary options strategies and articles such as Delta, Duke of York, Eachway Calls, Tug of War and more.