If you’re like most people, you’ve probably heard of binary options trading at some point.
If you’re like most people, you’ve also probably dismissed the idea as something that sounds vaguely interesting but which is probably above your head.
Yet, that’s simply untrue! We remember feeling exactly the same way, yet when someone we know convinced me to give binary options trading a closer look, we were amazed by the simplicity and how we’d completely misjudged it and over-complicated it in our heads.
Binary options are essentially a way for everyday individuals to get in on the 24/7, non stop carnival ride that is the global economy. Stock indexes, shares, commodities, currencies and more can be traded with this simple, easy to use tool.
So how does it work and why is binary options a good way to access and bet on the global financial markets and the endless opportunities and rivers of money they bring?
Let’s take a closer look.
What are Binary Options?
The word binary actually stands for ‘two parts’. Binary options got their name because when using them you can only bet in two directions – high or low. You are guessing that the price of something will be either higher or lower in the future than it is when you place the trade.
How are you supposed to know which way to bet? Well, that’s the fun part, and throughout this series we’ll be looking at ways to predict which direction a stock, commodity or currency is going to move. There are lots of ways to analyze things and try to improve our odds, but at the end of the day it has to be remembered that all binary options strategies can do is improve our odds – at the end of the day we’re still having a punt just like we would on anything else!
To give you a concrete example, let’s pretend we both know a fella’ named Toby. He’s a casual watcher of CNBC and knows a little about the big companies listed on the stock markets, but he isn’t a financial wizard by any means.
Toby decides that he fancies his chances in betting that Apple stock will rise in the next 3 months (1 financial quarter). He’s been watching iPhones and a new iPad sell like hot cakes and it doesn’t take a genius to realize that all those units moving out of Apple’s doors and stores are going to translate into real profits on the balance sheet.
So Toby decides to set up a binary options account and take a shot. Apple are due to report their earnings tomorrow and he has a good gut feeling he is right.
Toby sets up his account with an online binary options broker and places his bet. He places a ‘call’ option, which simply means he is betting the price of Apple will finish higher than it is today, and he decides on an expiry time of 48 hours.
That means, in simple layman’s English, that in 48 hours when the option contract expires, Toby is betting that Apple’s stock will be higher than it is at the time he places his bet.
If Toby is right, he’ll walk away with nice, healthy profits. If he’s wrong, he’ll lose what it cost him to take the options contract out and nothing more (various price ranges and expiry times are available). How much money Toby makes depends on by how much Apple’s price rises and where it is when the option expires.
There’s nothing overly complicated about that, is there?!
Here are a few more facts about options contracts to clarify things even further:
1. Options are taken for a fixed period of time, after which they automatically expire. This is decided by you, the trader, at the outset.
2. You can predetermine the amount you are willing to lose from the start. You’ll never lose more than the options contract costs. If, however, prices move in the opposite direction you’ve predicted, you will lose the full amount you paid for the contract. Profits, on the other hand, are technically unlimited and can rise as high as the market can push them before your option expires.
3. You never own, buy or sell anything when trading options. You are simply placing a bet on the direction the price will move.
4. Options are an all-in-one trading mechanism. They allow you to access stocks, currencies and commodities all in one account, whereas to buy and sell these assets in their own individual markets you’d need separate trading accounts.
5. You can bet in either direction. If you bet the price of an asset is going to fall, this is called a ‘put’ option. If you bet the price of an asset is going to rise, this is called a ‘call’ option. Remember these two terms as they are fundamental to binary options trading.
Are you beginning to understand now? Binary options trading is not the big, scary monster it is made out to be and looks at first. It’s actually a very simple, easy-to-use investment vehicle anyone can use to bet on any financial asset on the planet.
Oh, and there’s one more thing about options that makes them really attractive. Due to the fact that you never actually buy or sell whatever your trading, most governments consider profits made from options trading to be a form of gambling and so don’t charge capital gains tax or income tax on them*.
Do we have your attention now? We thought so! Soon, we’re going to look at some basic binary options strategies a total beginner can use to start making money on the markets right away.
Before we do that, however, let’s make sure we understand exactly what we can trade using options.
*Always check the law in your home country regarding taxes. We accept no responsibility for loss or legal trouble incurred as a result of this advice. It’s for educational and entertainment purposes only. It’s up to every trader to research the individual and ever-changing laws of his or her own country and remain within the bounds of the law.