What are Binary Options?

Binary options are relatively complex financial instruments that allow the holder to optimize the benefits of leveraging. A binary option is not a right to buy or sell an asset. Neither is it an asset in itself. It is a ‘bet’ of sorts on how the value of an underlying asset will change over period of time. Binary options allow you to make an immense profit if you have a good grasp of market movements and the factors affecting asset values.

A Prediction of Where the Price Will Go

To simplify, binary options can be defined as predictions about the price of assets. If your prediction turns out to be correct you make money, otherwise you don’t. The concept behind binary options is that the investor can simply make money based on his accurate predictions of how an asset’s value will move without having to invest in the asset itself. Since he does not make a capital investment in the asset, the binary option allows him to make an enormous profit, provided he is right.

Binary options may be a risky choice of investment for the uninitiated even while market savvy investors consistently make money. Beginner investors with limited awareness of market dynamics can start with binary options after they have gained a good grasp how the market reacts to various fundamental and technical factors.

Binary Options Explained with an Example

Understanding binary options is far easier when you have a simple example to work through. Let’s assume that you believe Company T has a revolutionary new product all ready for release. You think that this product will make company T a leader in its niche industry. Rather than investing in shares of the company, you limit your investment and buy binary options instead, that have Company T shares as the underlying asset.

At the time of buying the options, you predict that at the end of a specified expiration time (say, one week), the shares will trade at a specific higher price (say, $600 or above) and establish a binary pay off of $400 with a call option. If at the end of the binary options contract, i.e.: one week, the shares are trading at $600 or above, you are ‘in the money’ and you can take the $400 home with you. If the shares are trading below $600 or they are ‘out of the money’, you do not get the $400. The reverse is also possible. That is, you can predict that the price will fall, with a put option. If it does, you make money, otherwise you don’t.

Binary options are also called ‘all or nothing options’ because there are only two outcomes possible with these. You either make a profit or not, there is no midway or moderate profit to be made here. If you are still hesitant to invest in binary options, take this fact into consideration- you do not pay as much for the options contract as you would for the asset itself. This limited investment offers the potential of huge profits arising from leveraging!