If you tell someone you are considering trading binary options, you may have been met with skepticism or downright horror. It seems that binary options have received a bad rap since being part of over-the-counter (OTC) transactions in the early 1970s. These transactions were minimally regulated. In 2008, both the American Stock Exchange and Chicago Board Options Exchange (CBOE) offered regulated binary options publicly and internationally.
Although the popularity of trading Binary Options continues to grow, so does the misunderstanding that surrounds it. Many still view it as online gambling saying that those who trade do not even need to know how to read a chart. Then, there is the aspect of regulated and unregulated exchanges as well as the dishonest types who only want your money. Amid all the confusion, how do you ascertain the good binary exchanges from those out to swindle you?
Ten things to consider when choosing your binary options:
- Is the deposit location for your money inside or outside of the USA?
- Is the company OTC or Regulated? OTC is not an exchange. They know if you are getting in or out and winning or losing. Their terms and conditions may be based on regulations at best. If the exchange is regulated, then the trade is between you and other traders or market makers who do not know if you are getting in or out and winning or losing. They are registered with the Commodity Futures Trading Commission (CFTC).
- Do you get a Free Demo Account? Do you have to open a Live Account first? Be able to learn first, then open the live account.
- Beware of bonus games.
- Is trading locked or unlocked? Can you get out before expiration? If you cannot exit, you will win or lose the maximum amount.
- Understand how Settlement is determined. Is it based on the last trade price or an average trade price of the last 25 trades? The last trade price could be an erroneous trade.
- What is the underlying instrument based on: Stock Indices or Future Indices? Stock Indices are not tradeable because of gapping, which affects settlement dramatically and they settle earlier at 4:00 PM ET. Future Indices settle at 4:15 giving you more trading time.
- Do they only offer Fixed Strike (At the money- ATM) or Price Ladder Strikes (ATM, In the Money- ITM, and Out of the Money- OTM)? Of course, the more strikes offered, the more trading choices.
- Is only directional trading offered? You can only trade up or down, if only Fixed Strikes are offered. With ATM, ITM and OTM you can do multi directional trading.
- Risk/Reward Ratio should be at least 1:1 or greater. Probability should be proportionate to reward.
With the above information, you can make a more educated determination when trading binary options. Binaries may continue to have a bad rap, but you know what makes it good.
The CFTC maintains a website where you can view the status on all exchanges. To see those that are regulated, simply choose “Designated” in the drop down status menu.