How Much to Invest in Binary Options

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A Guide to Trading Binary Options in the U.S.

Binary options are financial options that come with one of two payoff options: a fixed amount or nothing at all. That’s why they’re called binary options—because there is no other settlement possible. The premise behind a binary option is a simple yes or no proposition: Will an underlying asset be above a certain price at a certain time?

Traders place trades based on whether they believe the answer is yes or no, making it one of the simplest financial assets to trade. This simplicity has resulted in broad appeal among traders and newcomers to the financial markets. As simple as it may seem, traders should fully understand how binary options work, what markets and time frames they can trade with binary options, advantages, and disadvantages of these products, and which companies are legally authorized to provide binary options to U.S. residents.

Binary options traded outside the U.S. are typically structured differently than binaries available on U.S. exchanges. When considering speculating or hedging, binary options are an alternative—but only if the trader fully understands the two potential outcomes of these exotic options.

Now that you know some of the basics, read on to find out more about binary options, how they operate, and how you can trade them in the United States.

U.S. Binary Options Explained

Binary options provide a way to trade markets with capped risk and capped profit potential, based on a yes or no proposition.

Let’s take the following question as an example: Will the price of gold be above $1,250 at 1:30 p.m. today?

If you believe it will be, you buy the binary option. If you think gold will be below $1,250 at 1:30 p.m., then you sell this binary option. The price of a binary option is always between $0 and $100, and just like other financial markets, there is a bid and ask price.

The above binary may be trading at $42.50 (bid) and $44.50 (offer) at 1 p.m. If you buy the binary option right then, you will pay $44.50. If you decide to sell right then, you’ll sell at $42.50.

Let’s assume you decide to buy at $44.50. If at 1:30 p.m. the price of gold is above $1,250, your option expires and it becomes worth $100. You make a profit of $100—$44.50 = $55.50 (minus fees). This is called being in the money. But if the price of gold is below $1,250 at 1:30 p.m., the option expires at $0. Therefore you lose the $44.50 invested. This called out of the money.

The bid and offer fluctuate until the option expires. You can close your position at any time before expiry to lock in a profit or a reduce a loss, compared to letting it expire out of the money.

A Zero-Sum Game

Eventually, every option settles at $100 or $0—$100 if the binary option proposition is true and $0 if it turns out to be false. Thus, each binary option has a total value potential of $100, and it is a zero-sum game—what you make, someone else loses, and what you lose, someone else makes.

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Each trader must put up the capital for their side of the trade. In the examples above, you purchased an option at $44.50, and someone sold you that option. Your maximum risk is $44.50 if the option settles at $0, and so the trade costs you $44.50. The person who sold to you has a maximum risk of $55.50 if the option settles at $100—$100 – $44.50 = $55.50.

A trader may purchase multiple contracts if desired. Here’s another example:

  • NASDAQ US Tech 100 index > $3,784 (11 a.m.).

The current bid and offer are $74.00 and $80.00, respectively. If you think the index will be above $3,784 at 11 a.m., you buy the binary option at $80, or place a bid at a lower price and hope someone sells to you at that price. If you think the index will be below $3,784 at that time, you sell at $74.00, or place an offer above that price and hope someone buys it from you.

You decide to sell at $74.00, believing the index is going to fall below $3,784 (called the strike price) by 11 a.m. And if you really like the trade, you can sell (or buy) multiple contracts.

Figure 1 shows a trade to sell five contracts (size) at $74.00. The Nadex platform automatically calculates your maximum loss and gain when you create an order, called a ticket.

Nadex Trade Ticket with Max Profit and Max Loss (Figure 1)

How to Start Investing in Binary Options

Damyan Diamandiev
Contributor, Benzinga

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If you’re looking for a simple way to trade and invest in financial assets, why not consider binary options? They’re easy to understand and preferred among newbies, so you’ve pretty much already got a head start in the right direction. Benzinga will help launch you the rest of the way.

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What is Binary Options Trading?

Binary traders profit from price fluctuation just like other traders, but binary options have a preliminary stated risk and profit potential. That’s why this type of contract is called a “binary” option. You get one of the two possible outcomes: suffer the risk or profit from the reward.

In binary trading, you bet if the price will be higher or lower after a certain time passes: the expiration. If you’re right, you win. If you’re wrong, you lose. When you lose, you lose the amount you’ve bet in the trade. When you win, you win around 80% of the amount you’ve bet (this depends on the broker as well).

Let’s say you believe the price of the EUR/USD will be higher in one minute and you bet $10. If you’re correct, you’ll profit around $8, depending on the broker. If you’re wrong, you lose your $10.

There’s some specific terminology wrapped with binary options. Can you sell an option? No, but you can buy a “put” option.

This is how it works:

Call Option

You buy a call option when you expect the price to increase. This means you enter a deal where you bet that the market will increase in price.

Put Option

You buy a put option when you expect the price to drop. This means you enter a deal where you bet that the price will go down.

Calls and Puts

It’s easy to understand the difference between “buy” and “sell,” and which corresponds to bullish and bearish markets. However, it might be tricky to remember the difference between calls and puts. Here’s an easy way to remember:

Imagine a phone is on a table. When you want to “call” you need to lift the phone “up,” an increase. When you want to “put” it down, it needs to go downward, or “drop.”

How To Start Trading Binary Options

Step 1: Build your strategy

Test different approaches and check which one is profitable for you. You can also combine different indicators to build your strategy. Some indicators could be:

  • Price levels
  • Trend
  • Candle patterns
  • Chart patterns
  • Moving average indicators
  • Fibonacci levels
  • On-chart indicators
  • Area indicators

These are not the only indicators available; there are many more and each of them works in a different way. Match signals from different indicators to reduce the chance of getting a bad signal and incline the scales in your favor.

Step 2: Calculate the returns

Say that your broker will give you 80% return if you guess the right price direction. You risk 100% of the invested amount, a return of 8:10. How successful should your strategy be and where is your break-even point?

Say that you do 100 trades by investing $10 in each. This means that you’ve invested a total amount of $1,000. Your strategy has a 55% success rate, meaning that you will get an approximation of 55 successful trades out of 100.

If you guess correctly, you’ll win $8. If you guess incorrectly, you’ll lose $10. Since you’ll get around 55 winners, this means you will make 55 x $8 = $440. Since you’ll get around 45 losers, then you will lose 45 x $10 = $450.

A profit of $440 – $450 (loss) = -$10 per 100 trades with this strategy, which isn’t ideal.

Here’s another test with the same brokerage conditions: 80% return on a successful guess. Let’s say our strategy has a proven record of 70% success rate. This means we’ll have 70 winners and 30 losers after 100 trades:

70 x $8 = $560 (profit)

30 x $10 = $300 (loss)

Net profit = $260

Step 3: Money management strategy

Don’t forget to factor in luck. If you deposit $100 in your account and you invest $20 in each trade, you’ll likely fail. The reason for this is that you will be able to handle only five losing trades in a row, which is very likely to happen.

It’s safe to have money for at least 100 trades. What is the chance to get 100 losing trades in a row? It’s just like flipping a coin and getting 100 heads in a row: pretty unlikely.

Step 4: Choose your binary options trading broker

Pay attention to some important rules when you choose a broker. There are scam brokers who will not let you withdraw your money, so research in advance. Good brokers:

  • Are regulated and conform to the laws of a country.
  • Have existed for a while. Scam brokers get caught and typically close after a year or two.
  • Have good reviews online. What are people saying about the broker? Can you withdraw your winnings?
  • Offer a variety of trading assets. You don’t want to have only five currency pairs available for trading.
  • Have a friendly interface.
  • Include a rich set of trading indicators. These indicators will assist in your analysis and help you build a successful strategy.

Step 5: Create and fund your trading account

This is the easiest step as long as you have the money! Follow your broker rules for creating an account. You’ll need to identify yourself and to confirm your account, then deposit the amount you are willing to start with.

Make sure you conform to the money management rules we already discussed. If you’re willing to invest $10 in a single trade, this means you’ll need to deposit at least $1,000. This way, you’ll have enough money to conduct 100 trades and you’ll be able to handle an eventual downswing.

Step 6: Execute your first trade

Now you’re ready to go! If you’ve deposited $1,000 in your account, then it is safer to invest only 1% per trade, or $10.

  • Change the investment per trade to $10.
  • Choose the expiration time of the binary option.
  • Do your analysis and apply your strategy.
  • Click “call” if your analysis shows that the price will go up or “put” if you believe that the price will go down.
  • Wait until the binary option expires.
  • Track results.
  • Repeat.

Final Thoughts

Binary options are an innovative and easy way to invest in the financial markets. Rules are simple (that’s why many traders prefer this type of trading) and there is a limited risk per trade, based on the amount you invest.

You’ll still need to conform to the well-known trading rules if you want to be successful. Build a strong strategy, calculate the amounts, manage your bank well and be smart, and you’ll increase your chances of success. A demo account is always a helpful test before jumping in with real money.

What You Need To Know About Binary Options Outside the U.S

What Do You Need To Know About Binary Options Outside the U.S?

Binary options let traders profit from price fluctuations in multiple global markets, but it’s important to understand the risks and rewards of these controversial and often-misunderstood financial instruments. Binary options bear little resemblance to traditional options, featuring different payouts, fees, and risks, as well as a unique liquidity structure and investment process.

Binary options traded outside the U.S. are also structured differently than those available on U.S. exchanges. They offer a viable alternative when speculating or hedging but only if the trader fully understands the two potential and opposing outcomes.

The Financial Industry Regulatory Authority (FINRA) summed up regulator skepticism about these exotic instruments, advising investors “to be particularly wary of non-U.S. companies that offer binary options trading platforms. These include trading applications with names that often imply an easy path to riches.” 

Key Takeaways

  • Binary options have a clear expiration date, time, and strike price.
  • Traders profit from price fluctuations in multiple global markets using binary options, though those traded outside the U.S. are structured differently than those available on U.S. exchanges.
  • Non-U.S. binary options typically have a fixed payout and risk, and are offered by individual brokers rather than directly on an exchange.
  • While typical high-low binary options are the most common type of binary option, international brokers typically offer several other types of binaries as well.

Binary options outside the U.S. are an alternative for speculating or hedging but come with advantages and disadvantages. The positives include a known risk and reward, no commissions, innumerable strike prices, and expiry dates. Negatives include non-ownership of the traded asset, little regulatory oversight, and a winning payout that is usually less than the loss on losing trades.

Understanding Binary Options Outside the U.S

What Are Binary Options?

Binary options are deceptively simple to understand, making them a popular choice for low-skilled traders. The most commonly traded instrument is a high-low or fixed-return option that provides access to stocks, indices, commodities, and foreign exchange.

These options have a clearly stated expiration date, time, and strike price. If a trader wagers correctly on the market’s direction and price at the time of expiration, they are paid a fixed return regardless of how much the instrument has moved since the transaction, while an incorrect wager loses the original investment.

The binary options trader buys a call when bullish on a stock, index, commodity, or currency pair, or a put on those instruments when bearish. For a call to make money, the market must trade above the strike price at the expiration time. For a put to make money, the market must trade below the strike price at the expiration time.

The broker discloses the strike price, expiration date, payout, and risk when the trade is first established. For most high-low binary options traded outside the U.S., the strike price is the current price or rate of the underlying financial product. Therefore, the trader is wagering whether the price on the expiration date will be higher or lower than the current price.

Binary Options Outside the US

Foreign Versus U.S. Binary Options

Non-U.S. binary options typically have a fixed payout and risk and are offered by individual brokers rather than directly on an exchange. These brokers profit from the difference between what they pay out on winning trades and what they collect on losing trades. While there are exceptions, these instruments are supposed to be held until expiration in an “all-or-nothing” payout structure.

Foreign brokers are not legally allowed to solicit U.S. residents unless registered with a U.S. regulatory body such as the Securities and Exchange Commission (SEC) or Commodities Futures Trading Commission (CFTC).

The Chicago Board Options Exchange (CBOE) began listing binary options for U.S. residents in 2008.   The SEC regulates the CBOE, which offers investors increased protection compared to over-the-counter markets. Chicago-based Nadex also runs a binary options exchange for U.S. residents, subject to oversight by the CFTC.

These options can be traded at any time, with the rate fluctuating between one and 100, based on the current probability of the position finishing in or out of the money. There is full transparency at all times and the trader can take the profit or loss they see on their screen prior to expiration.

They can also enter as the rate fluctuates, taking advantage of varying risk-to-reward scenarios, or hold until expiration and close the position with the maximum gain or loss documented at the time of entry. Each trade requires a willing buyer and seller because U.S. binary options trade through an exchange, which makes money through a fee that matches counter-parties.

High-Low Binary Option Example

Your analysis indicates the Standard & Poor’s 500 index will rally for the rest of the trading day and you to buy an index call option. It’s currently trading at 1,800 so you’re wagering the index’s price at expiration will be above that number. Since binary options are available for many time frames—from minutes to months away—you choose an expiration time or date that supports your analysis.

You choose an option that expires in 30 minutes, paying out 70% plus your original stake if the S&P 500 is above 1,800 at that time or you lose the entire stake if the S&P 500 is below 1,800. Minimum and maximum investments vary from broker to broker.

Say you invest $100 in the call that expires in 30 minutes. The S&P 500 price at expiration determines whether you make or lose money. The price at expiration may be the last quoted price, or the (bid + ask)/2. Each binary options broker outlines their own expiration price rules.

In this case, assume the last quote on the S&P 500 before expiration was 1,802. Therefore, you make a $70 profit (or 70% of $100) and maintain your original $100 investment. If the price finished below 1,800, you would lose your original $100 investment.

If the price expires exactly on the strike price, it is common for the trader to receive her/his money back with no profit or loss, although brokers may have different rules. The profit and/or original investment is automatically added to the trader’s account when the position is closed.

Other Types of Binary Options

The example above is for a typical high-low binary option—the most common type of binary option—outside the U.S. International brokers will typically offer several other types of binaries as well.

These include “one-touch” options, where the traded instrument needs to touch the strike price just once before expiration to make money. There is a target above and below the current price, so traders can pick which target they believe will be hit before the expiration date/time.

Meanwhile, a “range” binary option allows traders to select a price range the asset will trade within until expiration. A payout is received if price stays within the range, while the investment is lost if it exits the range.

As competition in the binary options space heats up, brokers are offering additional products that boast 50% to 500% payouts. While product structures and requirements may change, the risk and reward is always known at the trade’s outset, allowing the trader to potentially make more on a position than they lose. Of course, an option offering a 500% payout will be structured in such a way that the probability of winning the payout is very low.

Unlike their U.S. counterparts, some foreign brokers allow traders to exit positions before expiration, but most do not. Exiting a trade before expiration typically results in a lower payout (specified by broker) or small loss, but the trader won’t lose their entire investment.

The Upside and Downside

Risk and reward are known in advance, offering a major advantage. There are only two outcomes: win a fixed amount or lose a fixed amount, and there are generally no commissions or fees. They’re simple to use and there’s only one decision to make: Is the underlying asset going up or down?

In addition, there are also no liquidity concerns because the trader doesn’t own the underlying asset and brokers can offer innumerable strike prices and expiration times/dates, which is an attractive feature. The trader can also access multiple asset classes anytime a market is open somewhere in the world.

On the downside, the reward is always less than the risk when playing high-low binary options. As a result, the trader must be right a high percentage of the time to cover inevitable losses.

While payout and risk fluctuate from broker to broker and instrument to instrument, one thing remains constant: losing trades cost the trader more than they can make on winning trades. Other types of binary options may provide payouts where the reward is potentially greater than the risk but the percentage of winning trades will be lower.

Best Binary Options Brokers 2020:
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  • Binomo
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    Good Choice For Experienced Traders! 2nd place in the ranking!

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