Most of the traders are now evaluating Binary Options as their tool of choice due to the flexibility (in terms of contract size, expiry and the investment) and the high returns. Historically Binary or Exotic options were not available to an individual investor as they were not traded OTC. Post 2008, the Options Clearing Corporation and the exchanges have initiated the listing of these instruments OTC which has created a spur in their trading activity.
This article aims to provide a brief introduction to the concepts of Binary Options trading, their advantages and disadvantages and platforms available to a trader.
What Are Binary Options
In simple terms, Binary Options are options where the returns are “fixed” or ascertained beforehand for the punt the trader takes in terms of the price point (above or below) for a particular expiry (which is again at the option of the trader).
The Key Salient Features of Binary Options are as follows
- The return for a particular event is always predetermined.
- Unlike the “plain vanilla” options, the expiry levels of the binary options can be very flexible. For example, a trader can opt for a trade where the bet is on a price level above or below a particular point at the end of the hour.
- There is no exercise option before the expiry i.e. the trader will have to wait for the expiry period to actually determine the outcome.
- Can trade “bullish” or Call Option and “bearish” or Put Option
- Underlying assets can be practically anything. The popular ones include stocks, indices, currency pairs and commodities.
- The most popular types of Binary Options are “above and below”, “touch” and “range”.
Advantages of Binary Options Trading
- Binary Options are flexible in nature when it comes to the nature of the call in terms of price and time range which empowers a trader to take advantage of short term fluctuations in the underlying.
- Contract sizes are affordable(as low as USD 25) which helps smaller traders
- The upside and the down side are capped before entering into the trade which saves trades from the “bottomless pit” of conventional option writing.
Disadvantages of Binary Options
- Unlike the conventional options the price of the contract do not move in tandem with the underlying which means the potential of returns are not directly or directionally related to the underlying
- Binary options, due to their inherent nature, are “double or nothing” contracts potentially and a trader cannot get out half way as he is obliged to the contract until expiry.
Platforms for Binary Options
The best possible platform for Binary Options would be online. There are numerous brokers like Optionxp, Anyoption, Spotoption etc. who offer Binary Options trading. Each broker is generally unique in terms of payouts, underlying assets, operational credibility etc. and it is advised to undertake a thorough due diligence before venturing out for a trade.
Vijay Narayanan - Visit www.privateequitygcc.com for insightful PE related research on the GCC markets.
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