Binary Options Explained
| August 19, 2011 | Posted by Benjamin Huebner under Trading Basics |
What are Binary Options?
Binary options can be defined as contracts with a short life span of one hour or one day. They are also called digital options. When trading in binary options, you are allowed to buy on certain assets like stocks, currencies, indexes or commodities, and your right is always limited to a fixed return in case these assets expire in the money by at least one cent.
Binary options are a good way to grow your money without increasing the risk of your portfolio. You do not need a lot of knowledge on the different financial markets to trade with binary options.
Binary options are classified into two types cash or nothing and asset or nothing. The cash or nothing type is where contracts which expire in the money receive a fixed amount of cash. On the other hand, in the asset or nothing type, the value of the payout depends on the value of the underlying security.
Benefits Of Binary Options Trading :
- Risks is limited to the amount paid for the purchase of the digital options contract and can also be used to hedge risk on the other investment tools.
- Simplicity — The payout amount is not dependent on the magnitude of price change and thus it is easier for the new investors to trade in binary options
- Accessibility — The investor buys the contract and not the asset itself.
- Profitable — Profit is liked to change in direction of the price but not the difference in the price and it is easier to make large profits.
Disadvantages Of Binary Options
- Short term outlook because their expiration time is hourly or daily and is therefore difficult to predict the direction the market will move. This is not good for forecasting.
- High spread — This happens because the bid/ask spread can be very high for some assets and you need to have the money most of the time in order to offset the high spread before making a profit.
- Binary options usually deal with very illiquid market instruments which can be to dispose before expiration.
Trading Binary Options offers a hugh income potential even with small investments if it´s done the right way, but it´s critical to base any trading desicion on the right Binary Options Trading Signals to minimize the risk of losses massively!
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