What are currency binary options? – Definition and tutorial for beginners
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Binary options are financial instruments that offer fixed payments when the underlying market exceeds the strike price. It determines whether the market will exceed a specific price at any given time. Binary options trading functions by asking a simple question; will the market exceed this price? If you think yes, you buy; if you say no, you sell.
Binary options are a type of options contract in which payment depends entirely on the outcome of a “yes or no?” or true or false statement. Do not worry about it! The name may sound complicated, but binary options are probably an easier way to trade than traditional options or currencies. Like traditional options, binary options have a premium, strike price, and expiry date.
The difference is that with binary options, traders choose a “premium” for an option (usually determined by the market for traditional options) and have a much shorter expiry time.
Traditional options last from a week to two years, whereas binary options last from one minute to a few days. These changes make the most significant difference in how winning trades are counted.
Let’s take a look at how binary options work.
When trading binary options, the broker pays a percentage of the risk premium if the contract terms are met (for example, when the option is executed, the market price is above the target strike price). You get a fixed, predetermined return no matter how much the market exceeds the strike price or the fulfillment of a trade.
Whether it is 1 point or 1000 points, it is the same payment after the contract ends. There is no middle ground. This is why binary options are called all or no options.
How do currency binary options work?
A binary options contract consists of three key components:
- The underlying market. The market you want to trade in.
- Operating price. Redemption price plays a crucial role in the binary options decision process. To trade, you must decide whether you believe the underlying market will be above or below the strike price.
- Expiration date and time. Binary options can be traded for 5 minutes or longer for up to a week.
Are binary options legal?
Yes, binary options can be traded with regulated providers in the United States. Binary options trading in the US is legal and regulated, has low capital requirements, and is available to retailers. Ensure that exchanges that trade under CFTC regulations have legal oversight to protect you from unfair market practices. Also, ensure the exchange is in the US and trades with your own account.
Are binary options trading risky?
Yes, potentially! Here are some steps to follow to trade more secure binary options:
- Trade only on CFTC-regulated exchanges.
- Do not claim to be a broker or contact anyone who may exchange your account.
- Buy your account.
How to make money with currency binary options
Since you currently have a basic understanding of binary options trading, let’s show you a simple example.
Assuming you want to trade EUR/USD when the price goes up. The pair’s current price is 1.3000, and we expect the EUR/USD exchange rate to exceed this level within an hour. Then, if you look at the trading platforms, you will notice that the broker’s payout is 79% on an options contract of one hour and when the target strike is 1.3000. After much consideration, you eventually decide to buy a call (or upward) option and take a $100 premium.
This is analogous to a long EUR/USD position in the foreign exchange market.
Notice:
Traditional options last from a week to two years, whereas binary options last from a minute to a few days.
These changes make the most significant difference in how winning trades are counted. But before looking at ka-ching-ka-ching, let’s look at how binary options work.
When trading binary options, the broker pays a percentage of the risk premium if the contract terms are met (for example, when the option is executed, the market price is above the target strike price). You get a fixed, predetermined return no matter how much the market exceeds the strike price or the fulfillment of a trade.
Whether 1 pip or 1000 pips, it is the same payout at the end of the contract. There is no middle ground. This is why binary options are called all or no options.
Three types of binary options
The most important factor when talking about payouts is the type of binary option being traded. The examples of options trading shown in the previous section are variations of up/down options and are considered the simplest.
Predicting whether a currency pair will be above or below the strike price before it closes will yield the lowest returns. On average, this is 70-90%, depending on the broker.
On the other hand, more sophisticated types of options, like touch and range binary options, pay higher Forex fees as these types of trades tend to be harder to win. Based on what we have gathered, brokers usually offer payments in the 200%-400% range, and some can even go up to 750%!
Up/down options
Up/Down parameters can have several names, such as Max/Min, Up/Down, and Over/Under. This is the simplest and most common type of binary option.
Traders buy a call option when they believe the closing price will be higher than the strike price at the end of the contract and buy a put option when they think the market will close below the strike price at the end.
The previous section’s EUR/USD trading example demonstrates how Up/Down options generally work.
Very simple, right? Due to the simplicity of this option, the up/down option is usually the lowest fee.
Notice:
Up/down options usually expire in an hour or a day, but some brokers offer options that expire in minutes.
Some are done in seconds!
Of course, this can help your account or do much damage. Ensure you implement proper risk and manage your risk right!
Touch options
One-touch options do not need the market to close above or below a certain level. Instead, you can profit by concatenating the strike price at least once during the term of the option contract.
On the other hand, No-touch trades assert that the market price does not exceed the redemption price during the contract period for the trader to profit.
Touch Option trades are offered at certain times of the day. Some brokers offer touch option trades on weekends, usually offering higher payouts (about 250% -400% of risk premium) than simply trading/falling an option.
Range option
The range/limit/trade tunnel options are similar to playing in Super Mario’s underwater level. Super Mario can’t touch the top and bottom of the screen at the same time.
For breakeven trades, the market price must be within a predetermined interval, and the two strike prices must not be touched during the option period for the trade to be profitable.
Some brokers offer out-of-bounds options for traders to make money if the price exceeds a predetermined range for the option’s duration.
Conclusion – Currency binary options are trading instruments
All in all, currency binary options offer an easy way to speculate on the movements of the markets and to receive fixed payouts in the process. It is important to only trade on regulated platforms and to always remember to consider the risk involved. While up/down options are the simplest and cheapest, other types of binary options offer higher payouts but also require more trading experience. Whichever type of binary option you choose, it is important to have a full understanding of the terms, conditions and risks before investing your money.
FAQ – the most asked questions about currency binary options:
What is a binary currency option?
Instead of being leveraged as an investment, binary options are frequently used for trading on currencies based on speculation. Binary options on currencies give a whole set payout or nothing depending on the exchange value in the currency market at the point the option expires, which might be as soon as five minutes just after an option is purchased.
Can I trade currencies with binary options?
Most currency binary options are restricted to significant currency pairings such as AUD/USD, GBP/JPY, and GBP/YEN. Traders can begin trading online with minimal funds, similar to FX spot trading. Binary options are tightly controlled in the United States and are only offered on a few platforms, including Quotex, IQ Option, and Pocket Option.
Are currency binary options trading reliable?
Trading binary options are legal but potentially lethal and risky. You need to be aware of the risks and the constant market movements and volatility; otherwise, it would be best to avoid it altogether. Reviewers that promote currency binary options as a quick remedy for your money issues are not to be trusted.
Last Updated on February 27, 2023 by Arkady Müller
