This guide is the definitive guide to binary options strategy. New financial products are constantly appearing in the market. Some of these actually represent an improvement over those which are in existence already. Others have faded away on their own accord due to their unsuitability in the current market environment. However, off late, one financial innovation that has been gathering a lot of interest within the financial sector is Binary Options.
Otherwise known as “Digital Options” or “All or Nothing” options, these new kinds of options were created to eliminate the complexities of the traditional Call and Put options.
The Working of Binary Options
The simplicity of the majority of binary options is further enhanced by the fact that they have only one strike price Thus, if an investor bought a binary call option that closed above the strike price, he will be paid the maximum payout. On the other hand, if the market price is below the strike price, he will then lose everything. The contrary holds true for binary put options.
For example, you feel that the market is bullish and decide to purchase a binary call option for XYZ corporation share that is priced at $150 on the stock market. The cost of the option is $70 which upon expiration pays out $112, a return of 60%. Thus, if the market closes above $150 for XYZ share, you will receive a payout of $112. On the other hand, if the share price closes below $150, you will receive nothing. This means you will incur a 100% loss on your investment.
Although most binary options have a single strike price like the above examples, there are also binary options with multiple strike prices like those offered by CBOE and Nadex with expirations that are longer than a day.
The Attraction of High Yields Binary Options
Binary options can turnaround extremely quickly with an hourly or daily expiration time. If traders are consistently landing in the money, they can increase their profits and trading capital exponentially.
The yields that can be had from trading binary options range from 60% to 80%. Let us assume that a $200 binary option with a 75% payout expire in the money. An investor will receive $350 in return ($200 investment plus $150 [75%] payout) when he collects his payout on the option. Because the trades are done hourly and with such a high yield, it is almost impossible to calculate the compounding effect of the return of binary options.
However, if the trade expires out of the money, depending on the brokers and options, investors may recoup 15% of their investments or lose 100% of their investments. In most cases, it is difficult to unload an out of the money position.