Understanding Binary Options

Every now and again, you’ve probably come across some article or website that mentions ‘binary options’. When you hear the term you get the impression that it refers to either some new kind of investing or a new gambling scheme. Well, let’s clear up the confusion a bit – it’s a pure and legitimate investment tool.

Binary options are designed for those who love to take chances – which many investors enjoy about the stock markets in the first place. The risks are more closely associated with commodity type stocks due to the fast-paced nature of the options.

Binary Options 101

The methods for purchasing differ between the U.S. brokers and foreign brokers. In this article we’ll outline the method used by U.S. authorized brokers.  Keep in mind that all investments in binary options are based on a “yes”/”no” proposition. The price is always between $0 and $100 no matter how much you invest; you are allowed to invest in multiple options. There is a bid and ask price just as there is in other markets.   

The screen shot above is a binary option from 2014 on Nadex.  At the top, you’ll see:

NASDAQ US Tech 100 index > $3,784 (11 a.m.)

This is the question: Will US Tech be above $3784 at 11 a.m.? If your answer is “yes”, then you buy the option at the “ask” price of $80 (on the second line). If your answer is “no”, then you want to sell at $74, the bid price. 

The “size” indicates how many of these options you are willing to buy or sell. 

Anytime that you sell an option before the time it expires, you are going to lose some money.  Both Nadex and CBOE automatically calculate your maximum loss or gain (if you do a buy) at the time you fill out the form. Once you hit the “place order” button, you create the ticket that is time-stamped and dated for the record. 

Nadex charges you a $.90 fee for each option you enter and/or exit. CBOE uses a variety of brokers and they set their own fees so the fee cost will vary. 

Advantages of Investing in Binary Options

1. You cannot lose more than the cost of the trade – unlike forex or actual stocks
2. You can make a reasonable profit, especially in a quiet market
3. Binary options are low investment options where the average person can make money
4. You know in advance what price the stock has to reach for you to either win or lose (aka strike price)
5. The strike price changes often so if you don’t like a proposition come back in an hour and see if you like the new one better

Disadvantages of Binary Options

Because there are so many online brokers offering these trades right now, it is essential to do your homework and know what you are buying, and who you are buying from.  Don’t set yourself up to be a victim because you failed to do proper research. A proper preliminary research combined with an effective binary options trading strategy, will raise your earning chances dramatically.