It is easy to think that binary options trading is a complicated business, but in reality it isn’t that difficult to grasp. In fact, this type of trading provides traders with alternative ways to trade commodities and currencies, and even keep track of economic events.
The key behind this form of trading is the ability to trade with relatively small amounts of money and at a lower risk. Thus making it convenient especially with the uncertainty of monthly unemployment reports or perhaps a fall in the Euro or US Dollar. The smaller sums of capital invested into binaries helps lessen the risk of massive losses but still provides traders with the promise of potential gains.
Binary defined means “to involve two things”, which is a suitable description for the all-or-nothing approach this trading style offers. A trader will have one of two outcomes; gain from their risk or they will lose, the deciding factor is how long they wait for the trade to expire. The advantage is that traders will know the outcome of their risk before it happens. But how does it work?
Options Trading has two players, namely the buyer and seller – as with every trade. Done with a simple exchange in a regulated environment where the buyer and seller match each trade.
As an example if the trader thought that the price of oil would rise to above $2150 by 2:00pm the next day, they would buy a binary option to pay off if that trade came to pass. However, if the trader changed their mind, all they would need to do is sell that binary option and play it safe. When trading binary options, the trader is not physically buying the stock in the oil market, they are just predicting possible outcomes for it. The initial cost of this trade is dependent upon the price of oil in relation to the strike price and expiration time.
There is a fluctuation between $0 and $100 within any price. The higher probability of a trade for the buyer would be 100 while the seller would see a lower probability for the trade. Alternatively, the price approaching 0 would make it a high probability for the seller and lower the probability for the buyer. The probability rate would in turn be the equivalent to the binary trade price for the buyer who could sell the probability for a payout of $100. The actual payout would then be subtracted from the binary trade price.
Let us say that you have a hunch of 20% that the oil price will rise above $2150, you would buy a contract worth $40. The counter-part would then purchase the remaining $60 and pay $60 to trade on the contract. In turn making their prediction that the oil price will is not going to budge. It is a tug-of-war over whose instincts are better when trading, but with less risk involved.