Abstract：Binary options are a very simple form of trading where you can achieve high returns with limited losses. The outcome depends entirely on the trader's prediction. Many investors are obsessed with binary options, but every trade will have winners and losers. The reality is that the vast majority of investors lose money because they do not fully understand the logic behind the product. Here, we will reveal the true nature of binary options.
Preface
Binary options are a very simple form of trading where you can achieve high returns with limited losses. The outcome depends entirely on the trader's prediction. Many investors are obsessed with binary options, but every trade will have winners and losers. The reality is that the vast majority of investors lose money because they do not fully understand the logic behind the product. Here, we will reveal the true nature of binary options.
What Are Binary Options？
Binary options are a type of financial derivative, also known as exotic options. They are divided into two categories:Call Options (Bulish) and Put Options (Bearish). The return rate and trading time are determined at the start of the trade. Binary options involve predicting the price movement of the underlying asset relative to the strike price after a certain period. At expiration, there are only two possible outcomes: in-the-money (correct prediction) or out-of-the-money (incorrect prediction). Profitability depends on whether the underlying asset's direction at expiration aligns with the prediction. If the prediction is correct within the specified time, a fixed return is earned; otherwise, the initial investment is completely lost.
How to Trade Binary Options？
The trading method for binary options is very simple. Investors only need to predict whether the price will rise or fall within a fixed period and wait for the time to expire to get the result. However, investors can only earn a fixed return, and losses are also limited. The main steps are as follows:
Choose an Investment Asset: The first step in binary options trading is usually selecting a suitable investment asset. Everyone has a different level of understanding of various investment assets. The main investment assets available in the market include stocks, currencies, cryptocurrencies, indices, and commodities.
Predict the Price Movement: Once an investor has chosen an investment asset, they need to predict its future price direction. You can choose a call option (bullish) or a put option (bearish).
Select the Time Frame: Binary options offer various time frames. For long-term trades, you can choose several months, while for short-term trades, you can choose a few hours or even a few minutes.
Choose a Broker for Trading: After determining the investment asset, direction, and time frame, you need to choose a broker to execute the trade. During this process, you also need to decide on the amount you want to invest.
Wait for the Result: After reaching an agreement with the broker, you simply wait for the result. If the price at expiration matches your prediction, you will earn a return. If the price does not match your prediction, you will lose your entire investment.
Types of Binary Options
As the binary options market matures, different investors have varying needs for binary options. Many brokers have introduced various types of binary options investment tools to meet these diverse needs. The main types are as follows:
Binary Options Trading Cases
High/Low Binary Option
Underlying Asset: Stock of Company X
Prediction: Price will rise
Expiration Time: One day
Strike Price: Assume the current stock price is $10
Investment Amount: $100
Return Rate: 75%
Based on the above situation, the investor buys a $100 call option on Company X's stock. If the price rises to $13 after one day, the investor will earn a $75 return. If the price is below $10 after one day, the investor will lose the $100 principal.
Touch Binary Option
Underlying Asset: Stock of Company X
Prediction: Stock price will reach $11
Expiration Time: One day
Strike Price: Assume the current stock price is $10
Investment Amount: $100
Return Rate: 70%
Based on the above situation, the investor bought a $100 touch option on Company X's stock. During the one-day period, the price first reached $12, and the closing price was $10.5. The investor still receives a $70 return. If the price did not touch $11 at any point during the day, the investor would lose the entire principal.
No-Touch Binary Option
Underlying Asset: EUR/USD Exchange Rate
Prediction: The exchange rate will not reach 1.09
Expiration Time: One week
Current Exchange Rate: Assume the current rate is 1.08
Investment Amount: $100
Return Rate: 70%
Based on the above situation, the investor buys a $100 no-touch option on the EUR/USD exchange rate. As long as the rate does not reach 1.09 within one week, the investor will receive a $70 return. If the exchange rate reaches or exceeds 1.09 at any point within the week, the investor will lose their principal.
In/Out Binary Option
Underlying Asset: EUR/USD Exchange Rate
Prediction: The exchange rate will stay within the range of 1.082 to 1.087
Expiration Time: One week
Current Exchange Rate: Assume the current rate is 1.08
Investment Amount: $100
Return Rate: 80%
Based on the above situation, if the investor buys a $100 in-range option, and after one week the exchange rate remains within the range of 1.082 to 1.087, the investor will earn an $80 return. If the price is not within the 1.082 to 1.087 range after one week, the investor will lose the principal.
Spread Binary Option
Underlying Asset: Stock of Company Y
Prediction: The stock price of Company Y will increase by 30%
Expiration Time: One week
Current Stock Price: Assume the current price is $10
Investment Amount: $100
Return Rate: 90%
Based on the above situation, if the investor buys a $100 option and the price increases by 30% within one week, they will earn a $90 return. However, if the price does not increase by at least 30% within the week, even if it has reached the 30% increase at some point, the investor will lose their principal.
Advantages And Disadvantages Of Binary Options
Conclusion
The charm of binary options lies in its simple trading method, and any investor can quickly learn how to trade binary options. However, the difficulty of binary options is how to make long-term profits. Because its trading cycle is highly selective, many novice traders will adopt high-frequency short-term trading strategies at first. Without a good strategy as a guide at the beginning, investors can easily suffer huge losses. Therefore, I suggest that novice traders can use a demo account to trade binary options at the beginning, and then try real trading after forming a mature trading system.
FAQ
Can you really make money with binary options？
Yes, you can make money with binary options. Any legitimate investment tool offers opportunities for investors to earn profits. The key factor in determining whether an investor will make money is the investor themselves. A successful trading strategy that suits both the investor and the market is essential for long-term profitability.
What is the difference between binary options and regular options？
Regular options involve predicting the price movement of an underlying asset within a certain period, whether it's a call (bullish) or put (bearish) option. Binary options, on the other hand, involve predicting whether the price of the underlying asset will reach a predetermined level at expiration, rather than predicting the exact final price.
Are binary options legal？
Binary options are a legal form of investment. The market for binary options has matured in recent years, but regulatory approaches vary by country. Traders should check the regulatory stance of their country before engaging in binary options trading.
