Today’s post is an introduction to something I recently heard about called binary options trading. An Option is just a contract between 2 traders that allows one to buy (call) or sell (put) a financial asset at an agreed upon price before the contract expires. So a binary option then, is an option where you get everything or nothing, 2 outcomes, hence binary. In order to trade a binary option you will first need to have a prediction, on whether the price of an underlying asset (eg: stock, commodity, index, currency, etc) will move up or down. Then choose to buy or sell a binary option with a pre-determined strike price and expiration.

For example, Bitcoin trades at roughly \$750 each right now. If you think it will be higher tomorrow then you can use binary options to make a trade on your prediction 🙂 Here’s how it works. At expiration all binary options are worth either \$0 or \$100. The price is a reflection of how likely the market thinks the event will happen. So let’s say there’s a binary option that says the value of a Bitcoin will be over \$800 at 3 PM tomorrow. If the market (decided by traders) believes there is a 40% chance of this event happening, you can buy this option for \$40. Others who forecast Bitcoins will NOT be over \$800, can choose to sell this option and pay \$60. The combined total of what you both paid is \$100, this makes one complete contract. Then at 3 PM, you’re either right and take home \$100 😀 Or you’re wrong and get nothing while the seller wins the \$100 🙁 It’s binary because it’s all or nothing.

It’s easy to see how you can lose money if you’re not careful by just making random bets willy-nilly, but there’s also the potential to make big profits if you have a knack for predicting market trends 😉 Just like trading regular options, you can choose to place either a “Call Option” or “Put Option”

As you can see binary options allow traders to speculate, which is a relatively risky practice. But they also allow investors to hedge, which can reduce the risk of holding the underlying asset. There are many online platforms for binary options trading. A few examples include anyoption.com, which has a community of traders from over 150 countries. Bancdedinary.com, which claims to be the home to the 21st century investor. And 24option.com which says they endeavor to make the trading process as simple and profitable as possible.

This is only preliminary research for me and I think it’s an interesting way to possibly make some extra income. With the Dow Jones closing at over 16,000 today (record high) the stock market is starting to look a bit overvalued so I’m searching for new ways to invest 🙂 I currently don’t have any experience with options yet but I’m interested to learn more about it.

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Guest

Not familiar with binary options.

For regular options, you can buy or sell a call and can also buy or sell a put option. When you buy a call option, you have the right but not obligation to buy (1 contract=100SHARES ) at the strike price is a given length of time. When you buy a put option, you have the right but not obligation to sell (1 contract=100SHARES ) at the strike price is a given length of time.

When you sell a call option or a put option, you are paid up for for the premium. When you sell a call option, you are obligated to sell your shares at the strike price in a certain amount of time. When you sell a put option you are obligated to buy 100 shares at the strike price in a given amount of time.

Of course, options are a lot more than this.

Guest

Interesting, and sounds complex. Based on how you’ve described it here, it sounds like you’re basically betting against someone who thinks the opposite of you? I think I’ll stick to my dollar cost averaging – too much work for me! :p

Guest

This sounds a lot like betting on what the market is going to do, am I wrong? Have you had any personal experience with binary options and would you invest any of your money in them? I mean professional money managers struggle to figure out what the market is going to do, do you think an individual investor has a chance?

Guest

Sounds like gambling to me, unless of course you are an insider, and then I would not know what to call it – insider trading?… Not interested. I’ll stick to my annual poker game with friends for that kind of speculation thanks. Cheers.

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Chuck
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