Things Every Trader Should Know About Binary Options

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Things Every Trader Should Know About Binary Options

If you are looking for an article about trading techniques or tactics this is not it. This is an article unveiling many of the truths, or half truths, surrounding the binary options industry. Am I talking about scams, affiliate marketers, tipsters or gurus? No, I am talking about the industry itself, where it came from, where it is, where it is going and why you need to know. The industry exists on the internet, largely outside the lines of international boundaries and utilizing the digital marketplace in a way that allows average traders access that would otherwise not be possible. Some of the benefits of binary options includes simplified trading, fixed pricing/returns, no need for margin accounts and access to assets otherwise prohibited by account size or type. The main reason binary is so popular is because of this unprecedented access, easy to trade format and fixed returns.

Where Did Binary Options Come From?

Binary options have always existed. They originated as a gentleman’s bet between market participants and existed on the sidelines of legitimate trading. That is until the CFTC, along with the SEC, began to change the rules and allow for over-the-counter binary options trading. This change to rule, although misguidedly, led to the rise of the modern binary options industry. The thing is, 99.9% of binary options brokers on the internet today are not what the CFTC intended, are not CFTC compliant and therefore not acceptable for US citizens. This however did not stop many brokers from building platforms and offering what are now termed European or CySEC style binary options. Now there are several categories of binary including CFTC, CySEC, Japan FSA, “off shore” and few others. This means that there are a number of options, no pun intended, for traders to choose from.

Binary Options Regulation Is Not Regular

As I mentioned above the US CFTC, Commodities and Futures Trading Commission, is in charge of the rules and regulations surrounding the trading of binary options in the US. They have set forth a number of regulations that resulted in a unique form of binary trading known as 0-100 binary. These options have different strike prices and can be bought or sold at any time. NADEX and Cantor Exchange are the two most notable sources of binary in the US. For many years everything else was simply referred to as “off shore” binary. Off-shore binary is based on spot prices, you trade or bet the amount of your choosing on whether or not the asset will move higher or lower from the current, or “spot” price. These brokers were set up in banking havens like the Virgin Islands, The Seychelles and on Cyprus, where the first true non-US binary regulation took place. CySEC, the Cyprus Securities and Exchange Commission, began to regulate binary in 2020 and has made some real progress in terms of standardizing broker operations and ensuring the safety of trader money. Since then Japan has also entered the fray enforcing a style of trading that encompasses parts of both styles. To this day there is still no international standard or regulation for binary so traders often must choose to trade at their own risk with an unapproved or unregulated broker.

What Is The Difference Between A Platform and A Binary Options Broker?

A binary options platform is the software that enables trading. For the user it is what appears on the screen when you open your account to trade. The thing to keep in mind that the platform is not neccesarily the same thing as a broker. There are several white label platforms on the market that a business can buy or subscribe to in order to set up a binary options brokerage. SpotOption is perhaps the most well known of the white label platforms. There are several hundred binary option brands based on the SpotOption or Spot2 platforms. These brokers also share a central cashier system as well as other features. Some notable brokers using this platform are Banc De Binary, OptionTrade and Titantrade.

Now, there is also a big big difference between brokers, and not just between different regulatory types although that is a big difference as well. As mentioned previously US CFTC options at NADEX are based on the 0-100 method whereas CySEC options are based on the spot price. The thing is, not all CySEC, or CySEC style brokers, use the same math to determine the “spot” price. It is based on their own formulas and includes risk mitigating factors to help the broker maintain positive cash flow. In the end each CySEC style broker sells options at the rate at which they “feel comfortable selling options”, not the true market price. On top of that they do not all have the same assets, the same expiry types or even the same options. All will have a form of high/low, over/under or call/put trading and most will offer something else that may include range, boundary, one touch or speed trading. Regulation only adds to the confusion instead of helping it. A broker or platform regulated in one arena may not be regulated in another in which operates.

The Bottom Line

The bottom line is that binary options are here to stay. The state of regulation only proves it, if it were a passing fad then the practice would get squashed and fade away. Of course, there is still a long way to go before there is an international standard which will allow binary to be traded like forex but we are on the way. Until then education is the key for successful trading. Not only do you have to be a savvy trader you must know everything you can about binary option regulation, the platforms, the brokers and how it all relates to you and where you live. Choosing the wrong broker is more than having the right assets or expiry available, it means choosing the right broker and platform for you and where you live.

Things Every Trader Should Know About Binary Options

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A Guide to Trading Binary Options in the U.S.

Binary options are financial options that come with one of two payoff options: a fixed amount or nothing at all. That’s why they’re called binary options—because there is no other settlement possible. The premise behind a binary option is a simple yes or no proposition: Will an underlying asset be above a certain price at a certain time?

Traders place trades based on whether they believe the answer is yes or no, making it one of the simplest financial assets to trade. This simplicity has resulted in broad appeal among traders and newcomers to the financial markets. As simple as it may seem, traders should fully understand how binary options work, what markets and time frames they can trade with binary options, advantages, and disadvantages of these products, and which companies are legally authorized to provide binary options to U.S. residents.

Binary options traded outside the U.S. are typically structured differently than binaries available on U.S. exchanges. When considering speculating or hedging, binary options are an alternative—but only if the trader fully understands the two potential outcomes of these exotic options.

Now that you know some of the basics, read on to find out more about binary options, how they operate, and how you can trade them in the United States.

U.S. Binary Options Explained

Binary options provide a way to trade markets with capped risk and capped profit potential, based on a yes or no proposition.

Let’s take the following question as an example: Will the price of gold be above $1,250 at 1:30 p.m. today?

If you believe it will be, you buy the binary option. If you think gold will be below $1,250 at 1:30 p.m., then you sell this binary option. The price of a binary option is always between $0 and $100, and just like other financial markets, there is a bid and ask price.

The above binary may be trading at $42.50 (bid) and $44.50 (offer) at 1 p.m. If you buy the binary option right then, you will pay $44.50. If you decide to sell right then, you’ll sell at $42.50.

Let’s assume you decide to buy at $44.50. If at 1:30 p.m. the price of gold is above $1,250, your option expires and it becomes worth $100. You make a profit of $100—$44.50 = $55.50 (minus fees). This is called being in the money. But if the price of gold is below $1,250 at 1:30 p.m., the option expires at $0. Therefore you lose the $44.50 invested. This called out of the money.

The bid and offer fluctuate until the option expires. You can close your position at any time before expiry to lock in a profit or a reduce a loss, compared to letting it expire out of the money.

A Zero-Sum Game

Eventually, every option settles at $100 or $0—$100 if the binary option proposition is true and $0 if it turns out to be false. Thus, each binary option has a total value potential of $100, and it is a zero-sum game—what you make, someone else loses, and what you lose, someone else makes.

Each trader must put up the capital for their side of the trade. In the examples above, you purchased an option at $44.50, and someone sold you that option. Your maximum risk is $44.50 if the option settles at $0, and so the trade costs you $44.50. The person who sold to you has a maximum risk of $55.50 if the option settles at $100—$100 – $44.50 = $55.50.

A trader may purchase multiple contracts if desired. Here’s another example:

  • NASDAQ US Tech 100 index > $3,784 (11 a.m.).

The current bid and offer are $74.00 and $80.00, respectively. If you think the index will be above $3,784 at 11 a.m., you buy the binary option at $80, or place a bid at a lower price and hope someone sells to you at that price. If you think the index will be below $3,784 at that time, you sell at $74.00, or place an offer above that price and hope someone buys it from you.

You decide to sell at $74.00, believing the index is going to fall below $3,784 (called the strike price) by 11 a.m. And if you really like the trade, you can sell (or buy) multiple contracts.

Figure 1 shows a trade to sell five contracts (size) at $74.00. The Nadex platform automatically calculates your maximum loss and gain when you create an order, called a ticket.

Nadex Trade Ticket with Max Profit and Max Loss (Figure 1)

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