Binary options are also known as over/under options, digital options, all or nothing options and digital 100 options. They are a financial instruments that allow you to speculate on the future market movements of the asset the option is based on. A binary option can be based on a wide variety of different assets including stocks, currency pairs, indices and commodities.
A binary option only has two possible outcomes.
- The option can mature in the money, IE your prediction came through. If this happens then you earn a predetermined amount of money.
- The option can mature outside the money, IE your prediction did not come through. If this happens then you lose the money that you paid for the option.
There are no other possible outcomes. You always earn or lose the same amount regardless of how much the asset the option is based on changes in value. You can never be more then right. You are not more right because the option climbed a lot more in value then what you predicted it would.
Most binary options give high returns if your option matures in the money. IQ option, one of the most popular binary options brokers, give you a 91% return if the option matures in the money.
Binary options is a good way to make money on a stagnate market with small market movements that allow limited possibilities to make money trading other financial instruments.
Short and long options
Most binary options brokers offer short, super short and long binary options.
- Long binary options feature a maturity of a a couple of days up to several months. In some rare cases you can find long binary options with a maturity of a year or more. These options are good for betting on macro trends.
- Short binary options features a maturity ranging from an hour to a day. These options can be used to trade certain events such as annual reports.
- Super short options features a maturity of less then an hour. Many binary options brokers offer options with maturities as short as 5-15 seconds. Super short options is a good option for day traders and for speculators looking to capitalize on a trend. Super short options allow you to make a lot of trades in a short amount of time capitalizing on micro trends.
The broker is the underwriter
Binary options differ from other types of options in one important way. They are not traded on an open market. There is no way to sell options once you have purchased them.
Each binary options broker offer their own binary options that are available exclusively through their marketplace. Other brokers might offer other identical options. The broker acts as the underwriter of the option and collects the money you pay when you buy the option. They make a profit if the option matures outside the money since they sold you the option and they do not have to pay any return on it. If the option matures in the money then the broker pays you the agreed upon return and they make a loss.
All binary options are designed to earn the broker money. They only offer options that offer them a statistical advantage to make money. IE the broker always give themselves an edge. You need to skillfully pick which options to buy to make money.