A binary option is a simple method of investing in the price of an asset going up or down. So if an investor thinks that shares in Vodafone (VOD) will rise in value, they can take out a binary option to buy (place a ‘call’ on) Vodafone. If the price is higher at the point the option expires, they will receive a payout of between 70% and 95%, but if they are wrong and the price falls, they will lose their entire investment. So a £100 option could return £195, or £0.
How to open a binary option;
After that, it is a matter of waiting to see if the value of the underlying asset does move in the expected direction. Layers of complexity can be added as a trader becomes more advanced, but those are the basic elements of trading binary options.
This clarity is one of the attractions of binary options trading. Both the level of investment, the risk, and the level of returns are known as soon as the option is taken. There is no leverage on the investment, and the specific value of the price does not effect the eventual returns. Just whether it has risen or fallen.
Binary options are available on a range of different assets. Stock, foreign exchange rates (forex), indices or commodities (such as oil or gold). There are then a range of durations (referred to as the expiry time) over which the binary option will last. These range from 30 or 60 seconds to as long as week or longer in some circumstances. So a trader simply needs to pick an asset, a time horizon and decide whether the price will go up or down.
The payout on a specific trading option will depend on the underlying asset and the duration of the option. Generally, binary options pay out within a range of 70% to 95%. This percentage is made clear before the trade is made. Other than being higher or lower than the starting price, the closing price will not affect the magnitude of the payout. This is the significant difference between binary options trades and the majority of other investment vehicles.
While the above are the most common option types available, there are others. The key theme they all share however, is that the outcome will be binary – Yes, or no.
The best way for any novice traders to get involved in binary options trading is to open a demo account and get a feel for trading binary options without having to risk any money. Visit our demo account pages here. Alternatively, head straight to our list of regulated binary options brokers, where you can see reviews, the highest level of payouts, minimum deposit, minimum trade information, whether they are regulated (and by who), details on withdrawal methods and a list of the assets they have available.
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