What Is a Binary Options Market?

The binary options are an instrument wherein the payouts are either the predefined amount or nothing at all. The payout is offered if the option expires in the money or no payouts if the option expires out of the money. There are only two possible outcomes as indicated above, and hence the name. The trader does not actually own an asset as this options exercises through an automatic route. The trading platform of such instruments is known as the binary options market. There is also automated trading software to do the job for you for example binary option robot called option robot. It is the best binary options signals provider.

Understanding the “Binary Options Trading”

In the simplest term, the “binary options trading” is just making the prediction about the future direction of an underlying within a specified time period. If your prediction turns out to be perfect at the time of expiry, then you are entitled to receive the payouts otherwise you lose the risked amount.

Example: if you like to trade in a USD/EUR expiring in an hour in the binary options trading, then you just have to predict whether the USD/EUR will go up or down from the current market prices at the time of expiry. If the payouts for this pair is 85% and you have risked $ 100 on this pair, then for the prediction which is spot on – you receive $ 100 plus $ 85 (85% of the invested amount), totaling to $ 185. But if your predictions turn out to be incorrect then you lose your risked amount of $ 100 on the trade.

It is as simple as explained above and hence the binary options trading has been gaining popularity ever since its launch. The simplicity of the instrument, defined risk-rewards, and ease of execution are some of the major attractions of the binary options trading.

binary options market

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1. Robot selects you the best assets to trade

Trading platforms have assests such as currencies, indices, commodities and stocks.

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2. Robot Predict the Price Movement

If robot predicts the price of the asset to rise, it selects Call(up). If robots prediction is that the price will fall, it select Put (down)

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3. Decide on the Amount to Invest

Decide how much you want to invest and the expiry time of the option.

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How Does Binary Options Market Differ From The Plain Vanilla Options?

There are some striking differences between the vanilla options and the binary options. In the European style vanilla options, the holders of the options have the right to buy or sell the underlying asset at the time of expiry whereas, in the binary options, the holder of the options does not own the underlying at all. The vanilla options have no special feature while the binary options have several additional features as explained in the above example.

The plain vanilla options are often traded on regulated exchanges while the binary options are rarely traded on the regulated exchanges but they are most likely traded over the online platforms offered by various brokerage houses outside the purview of exchange regulations. As these are available outside the regulated exchanges, there are higher chances of fraud. The vanilla options are traded on the well-regulated exchanges and hence there is less likelihood of any kind of fraud. One of our recommended and regulated binary options brokers is IQ Option. With that you can’t go wrong.

The plain vanilla options have set strike prices for options and the investor has to pay a premium to own the options, while in the binary options, the strike prices are not predefined and an investor has to risk the entire amount. In the plain vanilla options, the premium decays as the time elapses whereas, in the binary options, the risk and reward remain the same till the expiry of an asset. The vanilla options also provide an early exit opportunity to the investors if he or she deems fit whereas in most cases, the binary options do not allow early closure and investor has no option but to wait till expiry for the outcome.

binary options market

If you have sold the plain vanilla options then you have an unlimited risk while there is no option to sell the binary options, so there is only limited risk attached to the binary options trading. As explained earlier, the risk, the reward, and the expiry is defined and set by the broker and the investors have no control over them.

Ina normal options, every PIP determines the amount of profit you make in case your option is “in the money”, while for the binary options, the amount of movement does not change have any impact on the risk-reward. In the case of the binary options trading, a single PIP movement in the direction of your prediction gets you the same payout as 100 PIP movement while the amount of movement makes a lot of difference in the case of vanilla options.

The outcome of your executed trade is determined only at the expiry in the binary options trading and the outcome can only be either a “win” or a “loose”. If your option has expired in the money, then you receive the payouts plus the invested amount otherwise you lose the invested amount completely. While in the case of the normal options, the amount of displacement of the underlying compared to the strike price decides the payouts.

A Real-world example of the differences between the vanilla & binary options:

Let’s assume that an S&P 500 is trading at 2030.

Vanilla options: Let’s further assume that a call option of 2050 strike price of S&P500 is available at $ 2 premiums for the current month expiry with a lot size of 50. You decide to pay the premium thinking that it will move higher than 2050. So, you have invested $ 100 in the trade (lot size (50) * $ 2 premium). At the time of expiry, if the S&P closes at 2050 then you will receive nothing but if it closes at 2051 then you are entitled to receive $ 50 ((expiry price (2051)-strike price (2050)) * lot size (50)). Even if your option has closed in the money, you have lost $ 50 on the total trade.

Binary Options: As there is no fixed strike price, you bought a call option of S&P500 at 2030 thinking that it will expire above it. At the time of expiry, if the S&P500 moves to 2031 then you will receive the preset payouts and if it closes out of money then you will lose the entire investment amount.

Advantages of the binary options over the vanilla options:

  • The binary options are simpler to trade and require a sense of direction of the underlying’s price movement. The vanilla options require the sense of direction as well as the magnitude of direction.
  • The binary options have predefined risk- rewards and are known to the investor beforehand. If you sell the vanilla options, then you are into unlimited risk zone while if you buy them then you have a limited downside.
  • The hedging and trading strategies of the vanilla options can be applied to the binary options.
  • In binary options, the payout amount is not in proportion to the amount of displacement of an underlying with the strike price while it is in proportion in the case of the vanilla options.
  • The binary options contracts have a wide range of expiry – from 60 seconds to up to 6-months. So there is a complete flexibility in selecting the time frame whereas in the case of the vanilla options there are several limitations.

What Forms The Binary Options Trading Market?

The binary options market is consisting of only two players – a broker & a trader or investor. A broker facilitates the execution of trade through its online platform. This online platform takes the real-time feeds from the exchanges and then makes the derivatives of the underlying called the binary options. Generally, these platforms are available through a website or a downloadable EXE file or through a mobile application. The brokerage websites provide several versions of the binary options to attract the investors and traders.

The trader or the investor has to select his or her preferred brokerage house and its website to enroll. Once enrolled, the trader has to deposit a certain amount of money in their trading account in order to execute the trades. The customer can see the real-time prices of the underlying and has an option to select his preferred expiry in order to make the commitment. Once decided, the customer can buy a call option if he thinks that the underlying will rise from the current market price and can buy a put option if he believes that an underlying will fall from the current market price.

The trader can only “Buy” and has no option to sell the contracts. The trade happens between the trader and the broker. Generally, the “seller” of the contract is the broker himself, however, there are some platforms which allow the execution of trades amongst traders. Once you have bought the “call” or the “put” option then you are not allowed to exit before expiry, however, there are some exceptions. If you had decided to bought a “call” option and at the time of expiry, the asset has moved even by a single PIP, your trade is considered a winning trade and you are paid the predetermined payouts, but if the asset has expired below the strike price then you lose the entire investment amount.

binary options market chart

Ancillary Service Providers

Alongside the brokerage houses, the ancillary business has also grown in the binary options market. These service providers provide services from standalone signals to an automatic trading platform. The standalone signal service provider does the heavy lifting of analyzing the markets in real-time and find a possible winning opportunity. They then inform their enrolled users via SMS, e-mail or social media platform about which asset to buy or sell and at what price. The majority of such service provider charge fees for their recommendations.

Another ancillary service includes the automatic trading software, which goes one step ahead of the standalone signal service provider. They not only provide the possible winning opportunity but have an inbuilt feature to execute the trade on behalf of you. They have a fixed brokerage association and works on specific brokerage software whereas the standalone service provider’s signals can be traded with any broker website.

Word of caution: the mushrooming of ancillary services has also attracted several con-artists to the play, and hence we recommend our readers to conduct thorough research about any signal service provider and brokerage company before committing their hard earned money.

Finally

This article provides the basic understating of the binary options, their differences with the plain vanilla options, advantages of the binary options over the normal options along with the binary options market makers. The selections of the brokerage house and the ancillary service provider makes a lot of difference for the trader and hence we advise all our readers to conduct an in-depth analysis of each and every aspect of them before funding your account.

You can read our various sections describing techniques to select the right broker, strategizing, selecting the right signal service provider and reviews of several brokerage & ancillary service provider websites. Our recommended automatic bot is the Binary Option Bot as it provides state of the art platform with world-class brokerage associations to satiate all your trading and signaling service requirements.

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Author: Michael Allen

Michael Allen is the main author at www.binaryoptionrobotinfo.com. He holds a PhD in Economics and has worked in investment banking for 24 years.

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Michael Allen

Michael Allen is the main author at www.binaryoptionrobotinfo.com. He holds a PhD in Economics and has worked in investment banking for 24 years.

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