An Introduction to Binary Options

Binary Options

In today’s difficult world economy, more and more people are asking themselves how best to invest their money. Searching the internet to learn more about investments, over and over again they discover the phrase “binary options”, and then they ask themselves, what exactly does binary options mean? Is this a legitimate investment, or maybe it’s really another way of saying gambling? In the next few paragraphs I will present the basic idea.

Let’s start by saying that any investment involves a certain amount of risk and that binary options investments are a far cry from the conservative approach of financial investment. Along with the risk, however, there is a high potential to make a lot of money in a short time.

How did binary options begin?

Although the term binary options is relatively recent, they have actually been around for a considerable time under their former name, ‘over the counter transactions’ (OCT) and at that time there were no regulations whatsoever. Then in 1973 the Chicago Board Options Exchange (CBOE) was established, bringing regulation to the industry for the first time. As the years passed, the CBOE reinforced its regulations making options trading more reliable and consequently, that it gained a reputation as a secure method of capital investment. The idea of binary options was to extend option trading by making it easier and more transparent.

In 2007, the Option Clearing Corporation suggested regulating binary options web platforms, and the following year, 2008, the Security Exchange Commission legalized and approved binary options. In that same year the American Stock Exchange became the first to offer binary options.

What are Binary Options?

The word binary in the financial concept of binary option means that the option can only have two results: win/lose, in the money/out of the money. Trading binary options is based on financial market performance so all investments are linked to what actually happens in the stock market. Traded options are also called assets;  these assets can be: Stocks, Indices, Commodities and Currency pairs, each and every binary options broker can offer different assets, but most of them maintain an assorted range of assets ready for the trader.

Investments can reach a whopping gain of 500% and as little as 70% at short time intervals, as short as 60 seconds and up to a week-long making it potentially a very profitable investment. Trading is made by choosing a certain asset and predicting its direction in a given period of time (a prediction can either be that the asset will go up i.e. Call option for an upward movement or a Put option if the investor predicts the asset will go down.

If the asset goes in the predicted direction, the investor stays in the money i.e. making a high percentage on his investment. If the prediction turns out to be wrong, the investor will stay out of the money, meaning he will lose his investment, or as some trading platforms, he will remain with 10%-15% of his investment.

In order to simplify how this works here is an example:

let us say we have investigated Apple stock (AAPL) and reached the conclusion that the price of the stock will rise; it is currently trading at $400 per share and we believe that in the next 15 minutes it will rise. We go to our online binary options broker and purchase a 15 minute Call option on AAPL for $100, within 15 minutes we will know the result of our investment: If the price of the share at expiry time i.e. 15 minutes after we purchased, it has risen by even one cent we will have made 85% on our investment (depending on the broker we have chosen) leaving us with $185 per each $100 we invest. If the price of the share goes down, we will have lost $100.

Investing your money in binary options isn’t like your regular investments in the stock market; it’s like purchasing a small number of stocks intending to keep them for a very short period of time (as short as 60 seconds) making a high profit from a small movement in the price of the share, and even the smallest movement counts.

I suppose that’s why some people call it gaming, and if taking a high risk for a potential of high profit is a game, then I guess they are right. In my opinion, is all investments involve risk taking and a wise investor doesn’t throw his money away without having made a serious analysis of his investment. By learning how binary options work and by using the different trading strategies, investors can minimize their risk and maximize their profit.