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The binary option is a financial derivative that allows traders to speculate on the price movement of an underlying asset, such as stocks, currencies, commodities, or indices, within a predetermined time frame. The term “binary” refers to the all-or-nothing nature of these trades: you either profit (if your prediction is correct) or you lose your entire investment if it is wrong. This simplicity has made binary options popular among beginner traders, but it also comes with significant risks.
Note: Today, some brokers are also offering more complex binary options where the outcome is actually not binary. It is always important to study the terms and conditions for the specific financial product you are interested in.
Binary options trading offers a simple and potentially lucrative way to speculate on financial markets, but it is fraught with risk. The high probability of loss, combined with a history of fraudulent activity in the industry, means that this form of trading has earned a bad reputation. In many parts of the world, brokers are no longer permitted to offer and sell binary options to non-professional traders (retail traders). Even if you are in a location where binary options are not banned for retail traders, it can still take some effort to find a licensed and reputable broker, since many of them have moved away from offering binary options to retail clients.
In binary options trading, you make a prediction about the direction in which the price of an asset will move within a set period. With a traditional binary option, there are two possible outcomes:
Example: If you believe that the price of a stock will rise within the next hour, you place a “Call” option with the appropriate lifespan. If the price is indeed higher at the end of the hour when the option expires, you get paid a fixed return. If not, you lose your investment.
There are many different types of binary options, and it is important to research the terms and conditions of the particular option you are interested in. One broker can have rules that are different from those offered by another broker, so read the fine print before you put any money at risk.
Here are a few examples of commonly available binary option types.
Due to the high risk and prevalence of scams, binary options trading is heavily regulated in many countries. For example, the European Securities and Markets Authority (ESMA) temporarily banned the sale of binary options to retail traders in the EU, to give the membership nations time to enact their own national legislation – which many did. In the United States, binary options are restricted and can only be traded on regulated exchanges. In Australia, brokers are not permitted to offer or sell binary options to retail traders.
These are just a few examples of regulations from around the world, and it highlights the importance of known the rules of you particular location.