Binary options – how to play the market?

Tomes of guides and articles were written to date on the subject of binary options. One can find in them exotic strategies, different ways of investing and numerous ways to make a big profit. However this guide is being dedicated to all the beginning market players who have no clue about the stock exchange but plan on investing in it.

Binary options trading in the premise is not difficult, it involves effective forecasting. It will be sufficient to anticipate future changes and trade the options in such a way as to get an option premium paid by the broker. However, in order to systematize the knowledge, we should start from the beginning and explain what in general are binary options.

Binary options – what are they, where did they come from?20-euros-1237948-638x437

Options are derivatives which have long been traded on the stock exchange. The term “derivatives” means that the value of the options is influenced by other underlying assets. They have been created in order to protect against drops and increases of the level of asset prices, so there are options both on stocks, bonds or stock index. You could say that every type of market has its counterpart in the options.

Since they are derivatives, the way of making money on them is also different than in the case of buy/sell stocks or shares. It is specified that the options have an asymmetric return profile. This means that the issuer is obliged to conclude a transaction, while the buyer has the right to buy the underlying asset under the conditions and deadline resulting from the parameters of the derivative. Similarly, it also means that the way of making profits on options is different than in the case of securities, here the buyer pays the seller an option premium which is independent from the price level of the underlying asset.

Binary options are a financial instrument which was created quite recently, that is in the last decade. The word “binary” by itself means double, in the case of this options it means that they can be used to hedge against both price increases and declines. They were approved for exchange trading on the territory of European Union on May 3rd 2012, but in Poland, due to high dynamic, their market is not fully regulated yet.

Why does investing in binary options pays off

Binary options trade is not hard and the basic rules can be understood by anyone, even by a layman. Binary options are financial instruments of high risk, which should be understood before making a decision about investing. However, unlike in the case of classic securities, you can get on them a return on investment at the level of 70-80 percent. It’s a lot compared to safe investments like deposits which generate only a 4% rate of annual interest.

Investing in binary options happens via a stockbroker or a broker. In practice, however, the latter has a bigger and more attractive offer of options for the average market player. Binary options trading is done through an online broker platform. Most often it boils down to the selection on the “Up / Down” slider and setting the expiration time and the amount of investment. The big advantage of investing in options is the possibility of peeking how much one can profit. Earning money on binary options occurs when the investor determines well the anticipated changes, that is receives the so called in the money option. Here, it is not possible to achieve an indirect payback, you either win everything or lose all the capital invested.

How to effectively invest in binary options

Here, unfortunately, the reader may be disappointed because there is no one, reliable way but that does not mean that one has to rely on luck. Successful investing in binary options is based on information and knowledge of the market. Experienced market players listen to the news and read about the planned changes in the economy. Sometimes even the least important political information can make the so far stable market go crazy.

Another issue is the knowledge of the market on which one invests. Every underlying asset, whether it is stocks or stock indices, has its specific fluctuations. On some the dynamics of change are smaller, on the others there are continuous jumps. An experienced market player is able to predict when to buy and when to sell options. Novice investors should use a binary options demo account, available on almost every brokerage platform. Often, trial accounts are available free of charge allowing you to learn how to invest somewhat “dry”, without involving real funds.

Keep in mind that binary options are not a magical way of making a fortune. As in any case, a certain knowledge and skills are required. Experienced market players gain effectiveness at the level of 60 percent and it allows them to achieve satisfactory profits. It is true that with binary options you can get a return of 80 percent of the capital invested, but certainly not in the short term.