Binary Option - The Facts Behind This Type Of Trading

By Author: Madeleine Wallace
Total Articles: 6
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Are you scratching your head, wondering what a binary option is? To put it simply, it's an investment vehicle with only two possible outcomes.

A binary option is actually easy to understand. An options broker will show you a variety of assets. After looking at these, you could choose one to buy. You'll then purchase a contract, which may last as short as a few minutes to as long as a whole day. Your goal now is to estimate the movement of the market and see if the asset you're looking at will rise in value or not. The only time you get the amount specified in your contract is if you accurately guess the outcome. If you don't make the right call, you stand to lose 85-100% of the investment.

There are only two predictions when it comes to a binary option. One prediction is being "in-the-money." In this scenario, your asset has attained a higher value during the time your contract has ended. Being "out-of-the-money" is the other scenario. This only comes about when the price of your asset has decreased by the time the contract has matured.

In binary options trading, there are two types to take note of. The ...
... first is the cash-or-nothing binary option. This one provides you a fixed price, with an average range of 150-185%. You only get this if the asset hits the strike price. An asset-or-nothing option, on the other hand, will pay you the entire asset value if you make the right prediction.

There are risks involved

An "all or nothing option" is another term to explain a binary option. With this particular kind of investment, you can lose everything if you make the wrong call. Even though some contracts permit you to get back between 5- 15%, it's still a major loss at the end of the day. To be successful at this, you will need to study and figure out how to predict short-term market fluctuations before you decide to give it a shot.

Reselling your assets to another trader is another binary option solution. Some traders buy assets for a higher price before the contract expires. Reselling assets at markup prices ensures you a return of investment. You also remove the risk of losing all your money in case the contract ends out-of-the-money.

Use a formula to evaluate the value of an asset

A lot of investors use a formula to evaluate the value of an option. There are a variety out there that you can try. In the end, the formula you make use of is really up to you. The one that sees frequent action is the Black-Scholes model. It comes with a few variations, depending if the option is cash or asset-based or whether it's a call or put.

In all instances, the formula takes into account a stock's current price, its designated payout level, its expiration date, and its volatility. The formula also considers the current interest rate for risk-free investing. Examples of this are government bonds, which may prove to be less risky than investing in an option.

Before you start trading

Look at the background of firms that do binary options trading. You can start by asking consumer trade groups and government agencies before you do anything. This will guarantee that the chosen company is a real and legal business. Another sign to look out for is whether the firm has a privacy information policy in place.

Madeleine Wallace wants to learn more about binary option and is seriously considering getting into binary options trading soon.