What Are Binary Options?

Written By Jeff Hindenach
Last updated December 1, 2020

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January 13, 2017

Simple. Thrifty. Living.

Binary options, also sometimes referred to as digital options or fixed-return options, are nothing new in the world of stock options. They have remained largely unnoticed or untouched by the majority of investors. However, the binary option trend has been steadily growing as more binary option websites begin to proliferate across the Web.

Serious investors often consider binary options more of a gamble than a true investment, with some investors going so far as to call them nothing more than a clever gambling scam masquerading as investments. Still, it’s hard to deny the appeal and lure of binary options once you understand the game. It is actually a fairly simple concept, requiring very little research and perhaps a lot of luck.

A Google search for binary option trading returns thousands of hits. Some of the most popular sites for binary option trading include:

  • TradeKing, which offers Binary Return Derivatives
  • binaryoption.com
  • bulloption.com
  • 24option.com
  • anyoption.com

Each site offers promotions and deals and promises high returns on investment, often in as little as an hour’s time. “Trading” can be done on all types of stocks, foreign exchange markets, commodities and pretty much anything that can be traded on the public market. However, in a nutshell, what you are really doing is betting on whether a stock will rise or fall within a specified time period. The time period can be anywhere from a few minutes to weeks and even months.

Example: consider that you believe XYZ stock will rise within 10 minutes. You put down $100 on that particular stock, and if you are right, you receive a payout based on the percentage listed on the site for that particular option, such as $75-$80. If you are wrong, you receive nothing back. (Some sites offer a small amount of money back, perhaps about $10-$15.) Statistically, this means that you need to be right just over half of the time in order to break even.

In addition to understanding the concept of trading binary options, it is also helpful to know and understand the terminology. The most common terms used in binary option trading are:

  • Options — A contract that grants you the right to sell or buy a particular stock for a specific price within a specified period of time.
  • Call — Refers to the order you put in for a stock that you believe is going to rise in price.
  • Put — A purchase order for a stock that you believe will decrease in price.
  • Strike Price — The set price that a stock must be exercised by in order to fulfill your option contract. If the stock price has increased to or passed the strike price, you will receive a fixed return. If not, you lose what you invested.

Because of the simplicity involved, binary options require very little research and planning, if any at all. Typically, all you need to open an account is a credit card.

Once you are registered on a site, you can make call or put purchases based on past stock trends showcased on the site you are using, or you can simply take your chances. Because you are generally just trying to sense and predict the direction of price movement, and not actually buying or selling stocks, there is generally less risk, which is also predetermined before you purchase an option.

All trades carry some potential for risk. A smart trader will measure the risk versus the reward, attempting a trade that offers the most reward with as little risk as possible.

Finding the perfect balance between risk and reward can be tricky. Several binary option trading sites, such as binaryoptiontrading.com, offer tips and strategies for the best times to trade, and how to better forecast rising or falling stock prices.

You’ll also want to decide in advance how much you plan to spend. You have to consider that you might lose whatever amount you plan to invest, so it is important to stick to a strict limit. Ideally, you’ll want to have at least $10,000 to utilize if you want your return to be substantial.

Trading at Reputable Sites

Explore the various binary option trading sites before settling on one. Read reviews and look to see if there are any additional fees you must pay in order to use a site. Reputable binary options brokers do not take commissions or charge a fee per trade, as is commonly done with other stock trades.

Take the time to read the terms of the contract on each site. Transaction costs should be clearly displayed, as well as the percentage of your return should you have a successful trade. If you can’t find these easily, consider using another website.

Binary options are not regulated like other stock trading is. Many do consider it a type of gambling, and it can certainly become addictive. Nadex is one particular binary options broker that actually is regulated by the U.S. government, and so is definitely one of the more reputable sites to visit.

Brokers at Nadex and other regulated sites must adhere to specific rules. However, more regulation also means less flexibility in trading, but many prefer the extra security, as well as a practice account that can be used for two weeks. The practice account is a great way to enter the world of binary options trading, hone your skills and see how you fare.

About the Author

Jeff Hindenach

Jeff Hindenach is the co-founder of Simple. Thrifty. Living. He graduated from Bowling Green State University with a Bachelor's Degree in Journalism. He has a long history of financial journalism, with a background writing for newspapers such as the San Jose Mercury News and San Francisco Examiner, as well as writing on personal finance for The Huffington Post, New York Times, Business Insider, CNBC, Newsday and The Street. He believes in giving readers the tools they need to get out of debt.

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