Binary option is commonly used instrument for trading on the financial markets and making profit from the price movements. However, all binary options traders should understand risks and possible outcomes of this frequently misinterpret financial product. Undoubtedly, binary options are something different than conventional options and has totally other risks, payouts, commissions. Far more that traditional options has completely other trading operations and different form of the liquidity.
Generally, binary options outside the U.S. usually completely differs from the options offered by U.S. exchanges. Supposing that investor completely understand both possible results of these options, he could take into consideration trading with binary options, which can serve as good alternative to traditional options. U.S. Securities and Exchange Commission cautioned local traders about the possible risks of managing these options. With this Commission decided that companies registered on Cyprus, offering binary options for U.S. traders is now illegal.
Binary options by itself has extremely simple trading process and it is very easy to understand its functionality, yet binaries stands for so-called “exotic options”. High-low option – the most favoured and also commonly used type of binary options, which gives the possibility to enter any financial markets in the world – indices, commodities and even foreign exchange! Such options has special indicator “strike price” and exact expiration time, therefore high-low options are called fixed-return options. In case trader betting correctly and the conditions are met – price of the instrument at the set expiration time has crossed the proper side of the strike price and no matter how much the price of the instruments moved, trader obtain his investments back plus profit – fixed payout, disclosed before making a trade. If trader making incorrect bet, he lose his investments for this wager.
Trading using binary options means always producing actual forecasts for the price movements. In case in future price will grow, trader need to choose “call” option. In case trader assume that markets will decrease in specific period of time, then he will purchase “put” option. To make profit using “call” option, final price of the particular instrument at the set expiry time should be below the “strike price”. Before making any trades, trader can see all his risks, set payouts and corresponding expiry time. For the majority of the foreign options “strike price” means current price of chosen financial instrument. Widely known instruments are: currency pairs (EURUSD, GBPUSD), shares and indices (S&P 500).
Thus, the main idea of trading with binary options is to guess where will appear the price of the chosen financial instrument at the moment of set expiry time – below or above the strike price.