What are Binary Options?

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An easy way to trade price fluctuations in various global markets is binary options, but a trader has to understand the rewards and risks of these frequently misunderstood instruments. You should know that binary options are different from traditional options. And if traded, one will find these options have different payouts, risks and fees, not to talk about a completely different investment process and liquidity structure.

Binary options traded outside the United States are also usually structured in a different way than binaries available on United States exchanges. Binary options are an alternative when considering hedging or speculating, but only if the trader fully understands the 2 potential outcomes of these exotic options. The United States Securities and Exchange Commission warned investors about the possible risks of investing in binary options in June 2013 and charged a Cyprus-based company with selling them illegally to United States investors.

What Are Binary Options?

Classed as exotic options are binary options, yet binaries are very simple to understand and use functionally. And the most frequent binary option is a high-low option. Providing access to indices, stocks, foreign exchange and commodities, and high-low binary option is also called a fixed-return option. And that is because the option has an expiry time/date and also what is called a strike price. The trader is paid a fixed return regardless of how much the instrument moved if a trader bets properly on the market’s direction and the price at the time of expiration is on the right side of the strike price. A trader who wagers in the wrong way on the market’s direction loses his/her investment.

He or she would purchase a call if a trader believes the market is rising. He or she would buy a put if the trader believes the market is falling. The price must be above the strike price at the expiry time for a call to make money. The price must be below the strike price at the expiry time for a put to make money. The expiry, strike price, payout and risk are all disclosed at the trade’s outset. For most high-low binary options outside the United States, the strike price is the current rate or price of the fundamental financial product, such as the S&P five hundred index, EUR/USD currency pair or a specific stock. For that reason, the trader is wagering whether the future price at expiration will be lower or higher than the current price.

Foreign vs. United States Binary Options

Binary options outside the United States usually have a fixed risk and payout, and are offered by individual brokers, not on an exchange. And these brokers make their money from the percentage inconsistency between what they pay out on winning trades and what they gather from losing trades. As there are exemptions, these binary options are meant to be held until expiry in an “all or nothing” payout structure. Many foreign binary options brokers aren’t legally allowed to solicit United States residents for trading purposes, except that broker is registered with a United States regulatory body such as the Commodities Futures Trading Commission or SEC.

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