What Are Binary Options?

By aaron on August 17, 2013 in exchanges

You may have heard of binary options, but there’s a fair chance that you don’t know what they are. Although these options have been available for a long time over the counter (where you buy the option directly from the issuer), it is only in the last few years that binary option exchanges have opened, making the options available for general trading.
With a normal option, when it expires you have the right to buy (or sell) the underlying financial instrument at the option’s exercise price, which was set when the option was first issued. For example, if the exercise price is $110, and the market value of the underlying financial instrument is $120 when the option expires, then the option is worth $10 at that point. However, before it expires, it has an additional time premium, which reflects the value that an investor is willing to pay in order to have that option for a period of time.

For example, if an option is set to expire in three months and the spread between the exercise price and market price is $10, the option might have an additional $2 value and be priced at $12. Of course, you can resell any options that you bought prior to their expiry.

Binary options work differently. Once you buy a binary option, you can’t sell it again. For example, you might buy a binary option on the EUR/USD exchange rate, saying that it will be above 1.20 at 3 PM in a week’s time. This option might cost you $40, and there is a guaranteed fixed amount you receive if the option expires in the money. If this guaranteed amount is $100, then if the option expires and the exchange rate is above 1.20, you receive the $100. If it is below, you receive $0. This is why it is called a ‘binary’ option.

When you are starting to trade binary options, one of the important things to look at is whether your broker offers bonuses, and under what conditions they offer them. Typically, when you make your initial deposit, the broker will offer you a bonus which is a percentage of that deposit. For example, if your first deposit is $1000, then a broker might offer you a 20% bonus, so that the total amount of money you have in your account is $1200.

However, you can’t just sign up, deposit $1000 and then immediately withdraw $1200. You normally have to make a number of trades before withdrawing the bonus amount, although you are free to withdraw the money that you actually deposited at any time. The other thing that you should know is that you can get bigger bonuses if you sign up to a binary options broker through another site such as Bonusbinaryoptions.net that has negotiated a special deal with the broker.
Remember, as with any investment, returns with binary options are not guaranteed. If they expire out of the money, you will lose the entire amount you invested. Because of this, although binary options offer the possibility of high returns, the risk is also higher than some other financial instruments, such as investing in stocks and bonds. It is highly recommended that you do not invest more than 5% of your deposit in any specific binary option in order to limit this risk.