Binary Options 101

1. Introduction to binary options trading: brokers, how it works, example of trade
2. Bid/offer levels from the brokers: what it means in terms of probabilities to end up in the money
3. Risk management: trade size and capital size
4. Strike selection
5. Charting Assets & Some Basic Chart Patterns
6. Can one beat the spread cost over long-term?
7. Time-based profitable trading systems
8. One-Touch and No-Touch Binary Options
9. How to play the 8:30am EST US announcement
10. Binary Options on Equities: Playing Earnings Announcements

Traditional Options:

An option in finance is the right, but not the obligation, to buy or sell a security at a specific price on a specific date and time (known as expiration). There are two types of options, calls and puts. Calls are the right to buy (or call away) the security and puts are the right to sell the security. Buyers of both call options and put options pay an amount upfront (called a “Premium”) in exchange for the option. The premium represents the maximum loss for the option buyer. At expiration, the buyer chooses whether or not to exercise the option based on where the underlying is trading.

In the case of a call option, the buyer’s payout is the price of the underlying asset at expiration minus the strike price. Buyers of call options are taking a bullish view on the underlying because the strategy profits when the underlying goes up. The more the underlying goes up, the more profit to the call option buyer. If the underlying is below the strike price, the buyer loses his entire investment.

Similarly, a put option buyer’s payout is the strike price minus the price of the underlying asset at expiration. Buyers of put options are taking a bearish view on the underlying because the strategy is profitable when the underlying goes down. The more the underlying does down, the more profit to the put option buyer. If the underlying is above the strike price, the buyer loses his entire investment.

Binary Options:

A binary option is a specific type of option that, as the name implies, has a “binary” outcome, that is, only one of two things can happen. For binary calls, if the underlying security is above the strike price, it pays out a fixed amount; if not then the buyer loses all of his investment. The outcome is “all or nothing” and the buyer does not make more money if the underlying goes up more than the strike price.

Binary puts work the same way except they express a bearish view: if the underlying security is below the strike price, the option pays out a fixed amount; if not, the buyer loses all of his investment.

Advantages of Binary Options:

Why would a currency trader want to use binary options? It is very simple. Currency pairs are not tremendously volatile. In order to earn big profits, you need to risk a large amount of capital trading them on a short-term basis. Trading traditional options requires large moves in the underlying to earn big profits. Binary options allow you to earn profits that are multiples of your invested capital, with even a small move in the underlying asset.

Valuing traditional options can be challenging. Buyers need to determine not only whether the asset will be above (or below) the strike price at expiration, but also by how much. There are complex formulas such as Black-Scholes to help buyers determine the probability distribution of the underlying price at maturity, and therefore the expected value. By contrast, a binary options trader only needs to determine the probability that the underlying asset will be above (or below) the strike price at expiration. By developing a diversified portfolio of binary options, the trader can grow his account if he makes successful bets on the majority of his trades.

One-Touch and No-Touch:

There are some additional features that can be added to binary options to increase the payout to the buyer. These features are one-touch and no-touch. In a one-touch binary option, the option pays out if the asset touches the strike price at any time prior to expiration, regardless of the price at expiration. A no-touch option only pays out if the asset does not touch the strike price at all prior to expiration.

This concept can be expanded to a double touch or double no-touch. In a double touch or double-no-touch binary option, there will be two levels, one above and one below the asset price. The asset will need to touch (or avoid) both levels in order to pay out.

Trading Binary Options:

The first thing to do is to open an account with a binary options broker, such as “Banc de Binary”. I suggest you open a Demo account to practice trading before you put your capital at risk. Once you see that you can make money trading these binary options, you will of course want to start trading real money. Next you need to select the asset you want to trade. Binary Options typically expire at 3:30 pm on the same day, and are struck at the current level. You select the direction you think the asset will move (up or down) and the dollar amount you want to risk. You should only risk a relatively small portion of your account (5% or less) on each trade, and make 20 or more trades each day. The market will tell you the payout you will receive if you are correct. Then you simply wait for the option to expire. The mechanics are quite easy. The challenge is in selecting the right assets and the right direction. That is where we come in. We can help you understand trends and develop profitable strategies using our Binary Options Trading Guide.