How Trading With Binary Options Works?

By | February 27, 2016

How trading with binary options worksFirst investor needs to choose an asset for which he/she will trade binary options for. Most brokers provide investors with possibility to trade with indices, stocks, oil, gold, silver and some other commodities. Let’s say investor chooses to trade with gold. Every option has expiry date/time. It is possible to trade days, weeks, hours even minutes. So if investor thinks price of gold will go up he/she will purchase a “call”, on the other hand if he/she thinks price will go down, he/she will purchase a “put”. Investor can purchase “call” option for gold in 2 hours. All it takes is to wait for 2 hours to see did price go up or down.

Important elements here are strike price, expiry and payout. All of these elements are already determined the moment investor makes purchase. The strike price is usually current price or rate of underlying financial product. Investor chooses expiry date/time. Payout is predetermined by broker and it depends on commodity, usual price fluctuations and broker’s policy.

If investor assumes price of gold will go up in near future he/she will decide to buy (binary) call option on gold worth 100$. Let’s suppose that current price of gold is 1.000 $. Investor chooses expiry time of two hours. This means that investor has chosen an option with an 1.000 $ strike price that will expire 2 hours from the moment he/she purchased option. The option pays 70% to investor if price of gold is higher than 1.000 $ in two hours. However if price of gold is below 1.000 $ in two hours investor loses invested money.

Let’s assume price of gold was 1.002 $ after two hours, which leaves investor 70 $ richer (70% of 100 $). Of course investor retains 100 $ invested in option.

It is possible to invest almost any amount, this can vary between different brokers, but usually minimal investment is 10 $ and maximum is 10.000 $. If by chance price for gold would be exactly the same as strike price on expiry broker would commonly return invested amount to investor, although that depends on brokers policy. Broker transfers all gains and losses to and from investors account automatically

What assets can be traded as Binary Options?

Investors can either trade with:

Stocks – usually all big companies stocks are offered for trade

Indices – e.g. Nasdaq, Dow Jones, FTSE, Nikkei and many more

Forex – all major currency pairs USD, EUR, GBP, JPY and AUD and many more

Commodities – Gold, Silver, Oil, Corn, Coffee and several more

To find out more about binary options visit our page Binary options.