What Are Binary Options?

What are Binary Options? Binary options are a type of instrument that provide a fixed deadline for expiration, with a fixed payout. Basically, it is a yes or no bet. The bet is on whether the a settled price of an underlying market will be at, above or below a target strike barrier, by a defined future time.

For example – on a Monday morning, a trader is trying to determine if the S&P will be at 1350 by Friday 4 pm? If the trader anticipated this outcome, the payoff on the North American Derivatives Exchange (Nadex) binary options would be $100 p/unit. If however it doesn’t reach this level, the payoff would generally be zero dollars. If the trader is correct, the return can approach extraordinary levels of 500% and more for only five days of play.

The term “binary” fits the condition of binary options – of being either right or wrong, all-or-nothing. Binary option trading fits perfectly into the digital era, which is based on binary logic.

Why They’re Important?

Binary options are an ideal trading instrument for new traders to test their skills because at a core level, binary options trading starts with anticipating direction. Being right on the direction is one of the core skills relevant to successfully trading any market. In fact, being wrong on direction accounts for a majority of the losses occurred in any trading. Another key skill important for mastering binary option trading is risk management. A binary option trade is not necessarily a set-and-let decision. This is a lazy trading style as it doesn’t demand active involvement but merely watching the screen and seeing what happens at the end of the week. Sometimes this can work if a trader enters at the right level and correctly anticipates directional volatility. However, trading binary options requires a sharp sense of timing. It’s crucial for a trader to know when conditions are ripe for entry as well as when market conditions have changed enough to justify getting out of the way.

Binary options are also important because they offer a level playing field. Anyone can trade the binaries and at very low costs ranging from $5 to $90 per lot at any moment in time. Because the time frame is at most one week, binary option trading counters the observed tendency of traders to hold losers too long and sell winners too soon.

Binary options also offer junior traders the ability to explore over 20 different markets. In a sense, binary option trading presents a discount tour of global markets. Perhaps one of the most important reasons of all is that binary options are regulated (through Nadex) and offer price-transparency.

Binary options are rapidly gaining traction. In the United States alone, traders have responded to this financial product by participating at increased volume levels of around 30%-50% p/month. At this pace of extraordinary growth, binary option trading can one day become as big as Forex trading, which is now approaching $5 trillion p/day.

Traders can now speculate on global financial markets while using only a limited amount of risk capital and without leaving themselves open to catastrophic losses in the event of unexpected market volatility. Binary options are small and self-contained enough to become the default choice for more experienced traders looking for a cheap real-money way to test out new technical analysis based trading systems, as well as being an additional toolkit used by conventional futures and FX traders alongside their more conventional trading.

Successful binary option trades not only require fundamental and technical analysis, but also psychological and behavioural discipline.