By Darrell Martin
Perhaps this is the first time you have visited this website and you are curious about binary options. What are they? How can they be traded? How do they work? This article will cover these questions in a basic manner.
What Are Binary Options?
Binary options are short-term, fast moving contracts with only two possible expiration/settlement values: $0 or $100. At expiration or settlement, because a binary option is a true or false statement, either the event happens or it does not. The binary option can be held until expiration. The contract can be exited before expiration, if trading on Nadex.
Benefits of Trading Nadex Binaries
Nadex, the North American Derivatives Exchange is a US based CFTC (Commodity Futures Trading Commission) regulated exchange. When you trade with them, you are never going to be stopped out of a trade. Your risk is always capped, defined and known upfront before you enter the trade. You can never lose more than the defined risk, so there are no margin calls. Very low margins are required, always less than $100 per contract. You can trade one contract for as little as $1 or $2, or you can do hundreds of contracts depending on the size of your account and the amount of money you are willing to risk per trade.
How Do Binary Options Work?
Binary options are a true/false statement. You are saying that either the event happens or it does not happen. For example, the statement may be The price of Crude Oil will be above $36.00 at 2:30 PM. If you think it is true, you buy. If you think it is false, you sell.
There is limited risk. The floor of $0 caps the risk of long positions and the profit of short positions. The ceiling of $100 caps the risk of short positions and the profit of long positions.
Binaries are settled at cash value of the option. There is no delivery of physicals, such as stock certificates, oil or gold. Nothing is put to you and nothing is called away from you.
The image below explains how Risk/Reward works on binary options.
You can see that if you were to sell a binary at $75, your risk would be $25 and your potential reward would be $75. If you were to buy a binary at $75, your risk would be $75 and your potential reward would be $25. However, depending on the direction of the market and your strategy, there are scenarios when each of these trades would be beneficial.
How Can Binary Options Be Traded?
Since binary options offer dramatic changes in value regardless of market volatility, they can be traded in both volatile and flat markets. Even if the market is not volatile, the binary is volatile. You can still trade binary options before a major news announcement, during a lunch time trading lull, during the Asian market trading hours and any time when there does not seem to be much going on. Remember, you are simply saying true or false to a statement (event) happening at a certain time (expiration.)