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What are Binary Options? | Definition for beginners (2022)

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What are Binary Options? | Definition for beginners (2022)

What are Binary Options? - Definition & examples.
It is doubtful whether there has ever been a capital markets instrument that has had as much tosh written about it as the enigmatic binary option. The internet has been flooded with articles written by low-quality 'content writers' lauding the simplicity of the instrument accompanied by call-to-actions .
Unfortunately, some of these call-to-actions have been along the lines of "Enhance Your Pension" and other such irresponsible marketing that has given the binary options industry a bad name in some quarters. So exactly what are binary options?
See this example of the execution of Binary Options:
Trading in binary options is not easy. That's because, with money, traders also need a good strategy and understanding of the market. Otherwise, they might lose all their investment to someone else.
The next question that comes to mind is, why invest in a market that is so risky? Even though binary options are a risky market, you can make a large profit. You can do this by knowing about different types of binary options, scams, and risks .
As you are new to this market, you must do your research before trying your luck. And through this definition, we will answer all your questions.
What are Binary Options?
Binary options are derivatives that make trade simple by turning it into a yes or no proposition. This fast-financial instrument has attracted various traders with its simplicity.
Binary options are all about predicting. As a trader, you have to guess whether the value of a commodity will increase or decrease. For example, you can predict the price of gold, Bitcoin, or a company's stock price.
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Binary Options example:
Based on your speculation, you can trade. For example, if you have predicted the value of a given item, you can make around 70-95% of the profit . That means if you have invested $100 and your speculation was correct, you can make a profit of $175 to $195.
But, if you miss the shot, you will lose all the money you have invested. It's simple, and you will either make a great profit or lose the entire amount.
Traders are showing a great interest in binary options trading because it is easy. And it does not involve complicated math.
Furthermore, the expiry time can be as little as 60 seconds binary options. Meaning anyone can trade several times a day throughout the world. Or it can be as long as a year.
(Risk warning: Your capital can be at risk)
A quick history of Binary Options:
It's essential to know about binary options history to understand this trading way in a better way. Binary options are not a new concept because it has been around for so many years.
When binary options trading started, only a few wealthy businessmen and large banks had access to it. But later in 2008, binary options trading became available for the public. And now, everyone can trade in binary options.
In 2007, the Options Clearing Commission wanted to make changes to the trading concept of binary options. So, a year later, the US Securities and Exchange Commission made binary options available for public trading.
Get to know the different types of Binary Options:
Till now, you might have understood that binary options are about predicting whether the price will be higher or lower at a specified time. But there is more to the story.
Here are a few popular types of binary options that can lead a trader to different levels of risks and returns.
1. Up/Down (High/Low) Options.
This one is the most basic and simple type of binary option. Almost all trader offers a straightforward way of trading in this market. Here, the price of an item chronically goes high (binary high option) or low (binary low option).
Most of the binary options trading scenarios can be boiled down to the concept of Up/Down. The basic principle of this trading type is to predict the price of an asset from the time of investment to its expiry period.
At the time of buying an asset in binary trading, its value is called the spot price. Now, here are two conditions.
Either the value of an item will increase from its spot price, or it will decrease. So, you have to predict the price movement. If you are assuming the value will go up, you can buy a call option. But if you are predicting the price to go down, buy a put option.
(Risk warning: Your capital can be at risk)
Example of how Up/Down (High/Low) Options works.
Let's assume you are trading on EUR/USD currency pair. For this, you are investing an amount of $200, and the expiry time is 30 minutes.
To trade, you need to simply guess if the price of EUR/USD will go down or up. Now, you assumed that the value of this currency pair would decrease in half an hour, and you place a put trade. If your assumption is correct, you will win $275.
But if the value of EUR/USD has increased in the given expiry time, you will lose the entire amount.
2. Touch/No Touch Options.
In the Touch/ No Touch binary option, a trader has to guess whether the price of a commodity will be higher or lower than the pre-decided value.
One thing you should remember in the touch option is that here value is fixed by the binary options broker. That means you cannot predict any specific price. Instead, you have to assume a correct situation.
In the touch option, you assume that the commodity's price will touch the strike price. And in no the no-touch option, you assume that the commodity's price will not touch the strike price.
Example of how Touch/No Touch Options works.
Again, you are trading on the USD/EUR currency pair. The value of this pair is 0.8934. Before trade starts, the broker fixes the strike price around 0.8939 .
If you assumed that the price of the currency pair would increase and it did even for a short period, your trade is successful. Meaning you will get more than what you have invested.
Even if the price is less than the strike price after the expiry period ends, you will profit because it has touched the target level.
(Risk warning: Your capital can be at risk)
3. Boundary Options.
Boundary binary trade, also known as In/Out trade, is mainly about predicting whether the price of an asset will be In the pre-established range or it will go Out. As compared to the other two trading options, this one offers a better return of 100%.
This trading technique is commonly used in the flat market. That's because, in a flat market, big price swings can't be predicted.
Example of how Boundary Options work.
Suppose you are trading on gold, and its current value is 0.8935. Its predetermined top value is 0.8940, and the button value is 0.8930. The expiry time is 30 minutes . Before the expiry time, you trade In, and the price stays within the given range. This means that you have made a profit.
4. Ladder Options.
This binary trading option is quite innovative because here, the broker sets different limits. Furthermore, this trading is represented in the form of a ladder, where rungs show different price levels set by the broker.
If you are trading using ladder options and have made the right assumptions, you can earn up to 1,000% profit. Even if you are partially correct, you will make a partial profit.
(Risk warning: Your capital can be at risk)
How do Binary Options work?
As we have already explained binary options, here's how it works.
To trade correctly in binary options, you need to make the right assumption of an asset's value. When it expiry, if the actual price of an asset and your prediction is the same, you will make a profit.
The gain or loss amount will be directly credited or debited from your binary account.

Source: What are Binary Options? | Definition for beginners (2022)