What are Binary Options? – Definition for beginners

Are you interested in trading binary options, but you don’t know how to start? You heard about this type of trading method but didn’t know what it’s all about? Don’t worry; we got you covered. In this article, we will give you all the necessary information on what trading binary options is; therefore it is easier for you to determine if this is the proper trading method for you or not!

What are Binary Options?

The first and most crucial step is to explain what Binary Options even are! The name Binary Options results in the fact that you can only achieve one of two outcomes with this trading method. You either receive a high return, or you lose the money you’ve invested. This is one of the perks of trading binary options since you know how much money you might lose. Other trading methods often don’t offer this factor; you usually invest your money into a stock, and a day later, you have lost or gained a higher return than you expected. With Binary Options, there aren’t any surprises when it comes to the possible profit or loss.

Do you still ask yourself, “What are Binary Options?” If so, don’t worry; the idea behind this trading technique is straightforward. You choose an asset, determine a specific price at a particular time, and if you predict correctly, you will earn a high return, but if not, you will lose your money. Sounds like gambeling? Gambling would be random guessing, but that’s not the case with this trading method.

Trading Binary Options is similar to betting on a sports team since you also have to predict an outcome, for example, if your team wins or not. More so, you analyze the team you are thinking of, look at past games, and have a look at the opponent. It is easier to predict a specific outcome and lower the risk of losing your money with the gained information.

When it comes to trading Binary Options, you can do the same. Instead of betting on a team, you choose an asset. You analyze how good or bad this asset was performing in the past and look at the general market, which will help you predict how well or poorly your asset might perform. Rather than randomly guessing, you can use all your knowledge, experience, and market analysis to make your prediction. This will lower the risk of losing your money. This also proves that trading Binary Options isn’t gambling since you don’t guess but rather analyze and build up a strategy.

Binary Options definition and meaning

So, what is the meaning behind Binary Options? This name is based on two words “binary”, a fundamental term in mathematics, which means “relating to, composed of, or involving two things” and “options”, which means a thing that may be chosen”. Therefore the definition of Binary Options is choosing two alternatives; in trading, it is assets. When trading Binary Options, you only have two options: selling or buying your assets. When it comes to other trading methods, you’d instead buy shares of, for example, stocks. Trading Binary Options is more about speculating with these assets rather than investing.

The two types of Binary Options explained:

Besides lots of strategies, there are also multiple ways of trading Binary Options. Here we want to introduce you to the two most common methods.

Cash-or-nothing Binary Option:

When it comes to the Cash-or-nothing Binary Option, the difference is that the trader focuses on the price; if an asset exceeds a certain price at a specific time, we talk about the Cash-or-Nothing Call, but if it is underlying the price, we call it a Cash-or-nothing Put. Compared to Asset-or-nothing, this type of Binary Options is cash-settled, while the other method is based on physical delivery.

Asset-or-nothing Binary Option:

The Asset-or-nothing Binary Option is similar but focused on the asset rather than cash. If the asset exceeds the strike price, it is called an Asset-or-nothing Call, but if it is underling, it is called an Asset-or-nothing Put.

History

Who invented Binary Options, and where does this trading method even come from? Here we will cover Binary Options history and give you all the necessary information on how this unique trading method came into existence. The immense success of Binary Options started in Chicago around 2008. At first, it was introduced as a tradable asset at the Chicago Board of Exchange. Since 2008 was a challenging year for the markets, people were looking for an easy and self-explanatory way to invest as an average trader. Even though many people started using this method and it gained great popularity, this is not the start of trading Binary Options. In fact, we can trace back the roots of this trading method until 1973.

In 1973 people were looking for easy ways to invest in the market, and since there were no regulations regarding Binary Options trading, it was attracting more and more people. This changed in 2007 due to a massive mortgage crisis and a collapse in real estate prices. The so-called “Options Clearing Committee”, short OCC, created a framework of regulations, with the result that Binary Options could be traded by itself rather than through complex contracts. This framework started to be official by early 2008 and completely changed how people perceived trading Binary Options. From then on, people could use this trading method at all significant exchange markets. For example, shortly after this regulation, people could trade Binary Options at the American Stock Exchange, short AMEX.

During this time, some restrictions came with trading Binary Options; for example, everyone who wanted to use this method had to purchase contracts on the S&P 500 index and was only able to trade so-called “Call-Options”.

Luckily these days, traders have a lot more opportunities when it comes to trading Binary Options; not only are they able to trade “Call” and “Put” options, but they are also a lot more flexible when it comes to trading itself. Thanks to new brokers and the mobility of apps. Trading has been as easy as ever. Trading on our way to work? Or in between business meetings? The new technology offers a wide variety of new possibilities. Traders nowadays have fewer restrictions; they can trade their assets across several markets and enjoy more freedom when trading. But not just that, through tools created by popular brokers, traders have the chance to opt up their trading game, through, for example, “simulated trading” and many new options to analyze the market. Technological innovations constantly open new doors for Binary Options traders, and we are excited to see what’s to come!

Examples for Binary Options (up and down option explained)

It is always easier to understand how Binary Options work with an example. Here we focus on the Up and Down option, also known as the Call and Put option. The first step is to choose an asset. We recommend choosing an asset that you are familiar with and are willing to spend more time on the analysis. For this example, we choose S&P 500. We assume the trader knows how this asset was doing for the last few days and the current day. You can see it was constantly trading at around 1500, but rising. Now you have to decide if you think the price will be above or under 1500 at whatever time you choose. For this example, we decide on the end of the day. Since the asset was rising all day, we predict that the price will be above 1500 at expiration – this is called an “Up” or “Call”. When trading Binary Options, you can choose whatever time works for you, let it be a few minutes until expiration or even a few months from now.

If you are right and the S&P 500 is over 1500 at the end of the day, you will earn a high return, but if not, you will lose your money. Let’s say you invested 200 Dollars into the “Call” Binary Options (this means that you think the price will be above 1500). How much you would earn at the end and how the last quoted price will be measured depends on your broker. In this case, we assume that the Payout is 70%. If S&P 500 finishes at, for example, 1502, you will earn 140 Dollars since your Payout is 70% and you invested 200 Dollars. Of course, on top of that, you will get your 200 Dollars back. BUT: if you are wrong and S&P 500 finishes below 1500, unfortunately, you would lose the 200 Dollars.

There is one exception: If your asset finishes on the strike price, in this case, 1500 for S&P 500, most brokers would give you the invested money back. Some brokers handle this scenario differently. Therefore, it can be a good idea to look into the regulations regarding trading with your broker before you start investing.

How do Binary Options work?

Many people dream of earning fast and easy money and are drawn to high-risk/high-reward trading methods. Trading Binary Options seems like one of those methods, but looking closely at how Binary Options work, you can see plenty of ways to reduce the risk. Unfortunately, there is no quick and easy way to make a lot of money without any trouble, but the more knowledge and experience you have when trading, the better. It is more about rational thinking rather than blind guessing. If you just want to start looking for an easy-to-understand method, this might be the right choice for you. We already explained what Binary Options are and the meaning behind them; now we want to cover how they work!

One of the perks of trading Binary Options is that you don’t need much to begin with, only a broker, some money, and a smartphone or laptop. Since this method is not about guessing, you should be willing to invest time into analyzing the market and the assets you are interested in. Constant planning, researching, and creating a strategy will help you lower the risks of losing your money.

But how do you start trading? Besides finding a broker that offers this trading option, it’s all about finding an asset that you want to trade. If you are already interested in a particular field or have experience in trading, this step is easy for you. Did you decide on an asset? Great, now it is time to analyze the market, see how the price changed throughout the week and the day. With time and experience, you will get a better feeling of how this works. You have to decide on the time and if you think the price will rise or drop concerning the strike price. We call strike price the price your asset has the moment you start trading. Now it is time to start trading in your brokerage. Be sure to understand the different returns and regulations that your broker has when trading Binary Options. Unfortunately, every broker has its own rules. Now it is time to wait and see until your chosen time. If your prediction was correct, you would earn a high return, but you would lose the money if not.

A few more words on predicting Binary Options: Even though the idea behind trading Binary Options is relatively simple and easy to understand, you shouldn’t underestimate the work that goes into a sustainable income through this trading method. Suppose you are just trading for fun or want to make a living being a Binary Options trader. Being a successful trader is based on your will to analyze the market and build up experience and knowledge. Luckily many brokers offer great statistics and options to monitor your assets. Therefore you have all the information that you need. The easy win or lose idea behind this trading method is more than that – take your time, get more and more experienced, and you will soon celebrate your first successes.

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