How to Trade Binary Options
Binary options are quite different from the traditional form of trading where the asset being traded is actually bought and possessed. With binary options, there is no possession, transfer or ownership of assets being traded. It involves simple anticipation of direction of price of the underlying asset. The binary options traders need not get into the details about the asset but only have an idea of what trend it follows and then anticipate the future price direction, of the asset.
There are many trading platforms that are available for the convenience of the traders. These platforms offer a plethora of assets to trade with binary options. Returns of up to 75% are assured for every trade that ends “in the money”, while an “out of money” option, and gets a generous 15% payback. Therefore, trading with these online platforms is not only convenient but beneficial too. However, to trade binary options, a trader must be aware of the call and the put options, which form the basis of binary options trading.
Binary Call option: as mentioned, binary options trading simply involves the anticipation of the price direction of the asset being traded. Therefore, if a trader anticipates that in the future, the price of the asset would increase from its present price, he needs to buy a Call option. The price, which is agreed upon by the option writer and the buyer is called the strike price and it needs to be breached at the time of expiration, for the trade to end “in the money”.
Binary Put option: if a trader assumes that in the future, the price of the asset underlying would fall from its present price, he needs to buy a Put option. A binary Put option is not the opposite of the Call option but an independent option in itself. Therefore, if at the time of expiry, the price of the underlying asset falls below the present price, the option is said to be “in the money”, and the trader gets his predetermined payoff.
Here is an example to explain the Call and the Put option:
Let us assume that an asset is trading at 100. A call option for 110 is offered at $5 and the payoff is decided to be $25, if the trade ends above 110, at the time of expiry. Now if at the end of the expiry time the price of the asset moves above 110, even by a single pip, the option is said to end “in the money”, and the trader gets his predetermined $25 as payoff. While if the price had not moved above 110, but remained below it, the trader would have got nothing and he would have lost the initial $5, which he had spent to purchase the option.
Taking the same example, a trader could take a Put option assuming the price to fall below 100. Now if at the end of the expiry time, the price does fall below 100, the option is considered to end “in the money” and the trader gets his payoff. While if the price had remained above 100, the trader would lose his premium and get nothing. Theoretically an “out of money”, option gets nothing, but the online platforms return a 10 to 15% of the investment, thereby reducing the loss of the investment to a certain extent.
