Binary options have become a very popular investment vehicle in a relatively short period of time. That’s because they are far easier to understand than most other forms of investments and offer higher yields along with more excitement.
In the UK there are a number of different binary option platforms – from where you can invest in stock market traded options. When trading binary options, investors make money by following and predicting the movement in values of assets like stocks, commodities, currencies, or indices. When trends happen, traders purchase options to capitalize on the movement. Here’s how it all works.
What Are Binary Options
Binary options are an investment vehicle that, unlike any other, only has two possible outcomes. Either the option will end with a predetermined profit, or a predetermined loss; there’s nothing between the two. When trading binary options, traders aren’t purchasing shares in a stock, or any other asset for that matter. Instead, they are simply predicting the movement of the values of the assets.
How Binary Options Work
Before we get into the details of how binary options work, I think it’s important that you understand a few terms. Here’s the lingo you’ll want to learn before you start trading…
Strike Price – This is the price point at which you commence trading – A trade must finish above or below this price depending on the position you take.
Expiry Period – An expiry period is the amount of time the option will remain open. Once the expiry period is over, the option will either expire profitable or with a loss.
Call Option – A call option is an option that’s purchased by a trader who believes the asset will rise in value above the strike price.
Put Option – A put option is an option that’s purchased by a trader who believes the asset will fall in value below the strike price
In-The-Money – This is the term used to describe options that expire with a profit.
Out Of The Money – This is the term used to describe options that expire was a loss.
Now that you know the lingo, here’s an example trade…
Let’s say for this example that Apple is trading at $125 per share. However, you’ve done your research and you know that the company is going to release its earnings report in two days. So, you schedule yourself to be available for the report. When the report is released, an uptrend makes itself apparent in the price of Apple stock. With the current pace of the trend, you think that the stock will reach $126 per share within the next 30 minutes. So, you purchase a binary option with a strike price of $125.75 (leaving a $0.25 buffer on the strike) with an expiry period of 30 minutes and a payout at 80%. To purchase the option, you pay $100. Now, there are only two possible outcomes…
In-The Money – After the 30 minute expiry period, Apple’s stock price has reached $125.92; exceeding your strike price of $125.75. As a result, the option expires in-the-money and you receive $180; $100 for your principal investment and $80 net profit.
Out Of The Money – After the 30 minute expiry period, Apple’s stock price has grown to $125.61. Unfortunately, this number is below your strike price. So, your option expires with absolutely no value; a net loss of $100.
As I’m sure you can see now, binary options are an incredibly easy way to realize great profits from the market, without actually purchasing shares. Now, this is not saying that there are no risks involved. Indeed, option trading is considered a high risk investment vehicle, but, with a little research you can reduce the risk considerably.