What really are binary options?

Binary options are a relatively new way to multiply your capital. Binary options trading is when the player “puts” on how the price movements will look in the given financial instruments. If they predicted well the direction of changes, they receive the payment.

The term binary options really means two options to choose from. Trader has really only two paths to choose from: bets on that the given investment measures will show the specified price movements or that they will not show.

Binary options are also often called digital options, this is due to the fact that the profits of the order shall be determined before the execution of the order and they are not subject to later revisions or changes – hence the term options with a fixed profit, which also refers to binary options.

Very often, in the context of this way of investing appears the phrase all or nothing and in this case it is reflected in how withdrawals from investments are made. If the trader has placed well, they take all. However, if their opinion has proved to be wrong then leaves with nothing.

The so called price of a bet on a binary option is given in the form of a pointer, which accepts values from zero to one hundred. If the events actually took place, the bet ends at the level of one hundred. However, if it didn’t, the price of a bet on a binary option equals zero.

Broker gives their stake for a given event on the market. At the time, in which an investor comes to the conclusion that the event actually happens in the future, buys the given bet. However, if they shall consider that the event will not take place, the bet is simply resold.

Let’s try to explain how to invest in binary options on a simple example: one of the most complex forms of investment in binary options is the up-and-down bet and based on it we will analyze the behaviour of the player.

Imagine that the time is 15:30 and the FTSE index listed on the Securities Exchange in London is worth 5 400. The day before its value at the end of the trading session was 5 425, therefore the broker gives the FTSE to Finish Up binary option- -what should be simply understood as an event in which the FTSE index reaches, at the end of the session, a value greater than the value of the previous day’s closure – with the price of 24-26.

The player believes that the FTSE will reach increases the closer it will be to the end of a session, hence their decision to purchase the FTSE to Finish Up options at a price of GP 20 for one percentage point, at a given price of 26.

It turned out that our player was right. The FTSE index at the end of the session had a value of 5 450. Investor collects GBP 1 480, which is the result of simple mathematical calculation (100-26)*20.

However, if the prediction of our player may prove to be incompatible with reality – the FTSE would report a high-low drop compared to its value the previous day, the price of the bet would be set to zero. Calculating accordingly to the same formula as above, it’s easy to see how much our player could lose in this situation: (0-26)*20 = -520.

As you will notice in the above example, before the investor decides to invest in the binary option, they know exactly how much they can potentially earn and how much they can lose. What is the undoubted advantage of this kind of multiplication of capital.

What are the types of binary options?

There’s really quite a lot of binary bets types but they all have one thing in common: the broker asks investors a question to which the answer is always zero-one. We either agree with the forecasts regarding a given change on the market, or we refuse to believe in these predictions. True or false. 1 or 0. Other options in the responses are simply not there.

Below I will try to briefly describe some of these most popular among investors – types of binary options betting.

1. One Touch options – the player must answer the question whether the specified index exceeds the specified value before the expiry of the order. If so, the value of the bet is 100, however, if it is not exceed, the value will be 0.

2. Ladder options – the player must answer the question whether the specified index shall end the period of the order above a set level. For example, an investor must refer to the finding that the index of X is above the level of 10,000 points. The value of the bet will be 100 in a situation in which the X index listed above exceeds the level, otherwise it will be 0.

3. Target options – the player has to answer the question whether the specified index will end a period of trade within a specified interval of prices. For example, the investor gets a question whether the index X reaches 20-40. If after the end of trading the index of X will receive a value between 20-40, the bet will be worth 100, if not, its value will be 0.

4. Hi Lo option – a player must answer a question of whether the value of the MAX (or MIN) will differ for a given number of points in relation to the value of the MAX (or MIN) from the previous day. Again, If the aforementioned event turns out to be true, then the value of this bet will be 100, if it proves to be false, then the value of the bet will be 0.

5. The Tunnel type option – the player must answer the question whether the value of the specified index before the bet was made will be between two demarcated limits. For example, the broker shall leave to the judgement of a player the following statement – the FTSE index reaches a value between <-50; + 50 >. If the value of the FTSE index before the bet was made will be located in this interval, the bet would end at the value of 100, and if it will not fit, the bet will be on level 0.

What is the subject of trade on the binary options market?

In this market trade applies to all sorts of securities across multiple classes, including:

  • Shares,
  • Stock market indices,
  • Raw materials,
  • Currencies (FOREX).

It is the last item – currency – which is the most popular in the binary options market. This is due to the fact that currency trading is done non-stop, twenty-four hours a day.

The second most popular position is held by shares. Their exact list depends on the broker whose service we shall choose. However, the most popular ones, for example related with modern technologies are available at almost every binary options broker.

A little less popular are the binary option on indices, however, in the market we find multiple indexes found in trade such as:

  • FTSE100 (United Kingdom)
  • Zurich SMI (Switzerland)
  • Tel Aviv 25 (Israel)
  • SSE180 (Shanghai, China)
  • The Nikkei 255 (Japan)
  • Hang Seng (Hong Kong)
  • CAC40 (France)

Unlike currencies, stock indices are available only for a few hours a day – when a stock market is open.

The last group are the raw materials, they are not especially popular in the options market. However, we can meet with options for gold, crude oil and silver. Trade in these materials is possible only if they are listed – and in fact their main markets on CBOT- Chicago Board of Trade.