Over the counter (OTC) binary options have some similarities to ordinary options but they are less complicated. Their main specifications are the expiration date, the strike price and the underline asset and they can be calls or puts. They are simpler in their construction than ordinary options because in order to be profitable someone has to predict if the price of the underline asset will be higher or lower from a certain price (strike price) at expiration and not the amount by which it will be higher or lower. The profit is a fixed return on the money invested on the trade (usually 60%-80%) or even a fixed amount.
When someone believes that the price of the underline asset (i.e. stock, forex, index, etc) will be above a certain price (strike price) at expiration then they have to buy a call option. If she believes that the price will be below the certain price then she should buy a put option.
Binary option trade example
Suppose that the EUR/USD is traded at 1.30254 and there is an option that expires after 10 minutes. If you believe that at expiration (after 10 minutes) the EUR/USD will be higher than 1.30254 then you can buy a call option or if you believe that it will be lower a put option. In that sense you are choosing the strike price at the time that you are performing the trade. If someone trades $100 and the return is 80% then if she is right she will make $180 but if she is wrong then she will lose all the $100 or almost all of them.
What does it take to be profitable in binary options trading
Trading binary options is the same as trading every other asset such as forex, stocks, futures or ordinary options. 90% of all prospective traders are losing money so in order to be in the profitable 10% you must have a strategy accompanied by a strict risk management. In other words you must do everything that a trader must do such as good understanding of the market you are trading in, knowledge of basic rules of technical analysis, discipline and patience. If you treat binary options as an easy way to bet or become rich quickly, due to the high returns on invested capital they offer, then you will soon find yourself losing money.
Are binary options brokers reliable?
In every job there are unskilled people who provide low quality results or even crooks and serious professionals who respect their selves and what they are doing and are morally committed to satisfy their clients’ needs. Binary options industry is no exception to it.
Before any money transfer to a binary options platform you must thoroughly investigate everything about the company on its site or on company reviews on the internet. The most important prerequisite in order to send your money to a platform is a clear and safe way to protect your account in case of broker bankruptcy.
Another general rule of thumb is to compare the real time prices that they show on their price charts to another real time data vendor especially when you are losing a trade. There is a possibility to manipulate a price chart in order to make you lose.
Always use your common sense and in the first sign of inconsistency from the broker’s part just demand your money back and never cooperate with them again.
Although binary options are legitimate exchange traded financial assets (i.e. at Chicago Board Options Exchange or CBOE), you can rarely find them in a stocks, futures, forex or ordinary options trading software. Almost all platforms that provide such a service are focusing on over the counter binary options (OTC), meaning that the counterpart of the trade is your broker and the option contract is not standardized. That’s why someone has to be extra careful. Exchanged traded assets are better regulated and the investor/trader is protected by an official authority (i.e. the SEC for US exchanges).
If you are interesting in OTC binary options trading then a fairly reliable binary options broker is Banc de Binary and you can visit their site in order to perform your due diligence. It requires a minimum deposit of $250 to start trading and it provides clients a demo account of $50,000. You can also download their free e-book which includes a clear and simple explanation of basic concepts in binary options trading.
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