Finance, Investing

The Background Story of Binary Options

binary-optionsI first came across the word binaries while playing Scrabble. When my opponent put down the word ‘binaries’ I questioned its validity-and I lost. That was 10 years ago. Since that time there have been many more queries regarding the trading of binary options but now they are traded daily on stock exchanges throughout the word and the volume of daily trading has exceeded all expectations.

So what are binary options? The word binary basically means an option with only two possible results: the trader can either win or lose, or will end up in-the-money or out-of-the money. As in any investment, taking out a binary option involves a certain amount of risk. The reason for their increasing popularity lies in the fact that they are easy to understand and carry out, and they offer potentially high profits within a short time. Conservative investors may have a problem dealing with them, but they have certainly taken on in a big way among the younger generation.

Let us start by explaining that although the term is relatively recent, the concept has been operating for decades under another name: over the counter transactions (OCT). Until 1973 there were no regulations regarding OCT trading, but in that year regulation was brought in by the Chicago Board Options Exchange (CBOE). CBOE continued to tighten up the regulations which had the desirable effect of improving the standing of binary options as a legitimate trading tool. In 2008, one year after the Option Clearing Corporation suggested regulating binary options web platforms, the Security Exchange Commission gave binary options the green light. Consequently, later that year the American Stock Exchange became the first to offer trading in binary options. To read more about the history of binary options click here.

The movement of binary options, also known as assets, is based on the performance of these assets in the financial market. The assets offered for trading vary according to the broker, but they generally include a range of Stocks, Indices, Commodities and Currency pairs. Traders can take out options for a limited period of time, as short as 60 seconds, up to a week, during which they predict the movement, up or down, of their chosen asset. The right prediction can result in a great profit, in which case the trader ends up in-the-money, or a loss of all the investment (although some brokers leave the trader with a certain amount (around 10%).

Example:

Let’s say we have decided that the price Apple stock (AAPL) will go up; it is currently trading at $400 per share. We call our online binary options broker online and purchase a 15 minute Call option on AAPL for $100. If the price of the share at expiry time 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. Should our prediction turn out to be wrong, If we will lose$100.

Unlike regular investments on the stock exchange, with binary options the idea is that the investor buys a small number of stocks for a very short period of time, predicting only the movement up or down. Even the smallest movement of the stock will give bring a good return.

Although binary options are still regarded with suspicion in some quarters, it seems that they here to stay. Some conservative brokers might still look upon them superciliously, but they are definitely now mainstream. And for those who like the idea of taking a risk in the hope of making a high profit in a short time, binary options could be the way to go. The important thing for the investor is to learn as much as possible beforehand. In this way he can develop a trading strategy which will ensure maximum profit with minimum risk, to read more about the different trading strategies click here.

A post by MIke Evans (1 Posts)

MIke Evans is author at LeraBlog. The author's views are entirely his/her own and may not reflect the views and opinions of LeraBlog staff.

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