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, which has a community of traders from over 150 countries. Banc de binary, which claims to be the home to the 21st century investor. And 24option 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. Maybe Chuck the professional trader, or the starving artist will stop by and give us their thoughts on binary options in the comments