A binary option is a fast financial option whose payout is either a fixed amount of money or nothing at all. It allows investors to predict which asset will increase or decrease in a given time frame.
How to Make Money on Binary Options Online?
How It Works?
For example, a trader could trade EUR/USD and predict that the price will rise or fall. On his trading platform, the trader can find a broker who offers a payout rate for an options contract that expires in a few minutes or hours. The trader can then decide to buy a “call” or “up” option if he believes the price will fall, or a “put” or “down” option if he believes the price will fall, risking a premium that goes to the broker. If the prediction is correct, the trader is then immediately credited with a payment calculated from the broker’s payout rate and the premium invested. If the prediction is wrong, the trader loses all his money.
Every broker in binary options trading will have its own payout rate. Forex Ninja states that most brokers will offer a payout rate of 70% to 75% for a basic option, while others go down to 65%.
The rate is not a figment of the broker’s imagination; a myriad of factors determine how the rate will be:
- The underlying assets: More valuable assets such as precious metals are more likely to result in a higher payout rate
- Time to expiration: The longer the time to trade, the lower the payout rate.
- Market volatility: If the market is stable and does not experience too much upheaval, the payout rate will be low.
- Broker’s commission: The service that the broker provides to the trader also takes into account the payout rate, as the broker receives a commission for executing the trade on behalf of the trader.
Types of Binary Options Online
There are three general types of binary options that you can trade online.
1. Up or Down options:
Also known as call or put options and high or low options, these are the simplest type of binary options available online. All you have to do is predict whether the price of an asset will rise or fall when the option expires.
2. One Touch options:
These options are also simple enough. You must predict whether the price of an asset will reach or “touch” a certain price by either rising or falling before the option expires.
3. Range options:
These binaries allow you to predict whether the price of an asset will stay within or above or below a certain range or rise before the option expires.
Closing a Trade
A binary option can be closed prematurely if the broker allows the decision. This often depends on the type of option and is usually only possible within a certain time frame (e.g. 5 minutes before the option expires or 5 minutes after the deal has been opened).
Brokers who allow an early close of trading tend to have lower payout rates than most others.
Furthermore, the value of the trade tends to move with the underlying value of the asset. In the case of a “put option”, for example, the value of the trade increases if the value of the asset continues to fall. Therefore, the closing value of the trade may exceed the initial premium but not the agreed maximum payout.
If the value of the asset increases rather than decreases, the value of the trade decreases until the option contract expires or the trade is closed. The trader then receives part of the premium if the trade is closed, or none of it if the trade expires at a loss.
The broker commission is also taken into account when the option is paid out if the trader has closed the trade prematurely or even at a loss.
Dos and Don’ts in Binary Option Trading
Given its all-or-nothing nature, binary options trading can be a very risky undertaking. Here are a few tips to help any beginner with this process.
1. Use Candlestick Charts
A candlestick chart shows the rise and fall in asset prices over the years. At first glance, they may look like gibberish, but with time and some basics, reading a candlestick chart should be easy. The information that a candlestick chart provides is invaluable.
2. Research Underlying Assets
You should fully understand the assets you wish to trade. Trading a binary option with little or no information is more like gambling, not trading. A good trader can use information about the asset that circulates in the news or rumor mills to make accurate predictions about the rise and fall of the asset’s price.
3. Pay Attention to Trends
Sure, it’s more lucrative to bet that the price of an asset will rise after it has fallen steadily, or to bet that the price of an asset will fall after it has risen steadily, but it also carries enormous risk. There is no guarantee when the trend will stop, so the safest bet is to follow the trends, especially if they are short term binaries.
4. Play it Smart
You cannot predict the behavior of an asset with complete certainty. So even if you believe with every fiber of your being that a trade will go your way, make sure you have not put all your eggs in one basket. The risk in binary options will always be considerable, even in the best of circumstances. Any number of things could go a different way and take you from potential wealth to literal poverty.
5. Avoid Rookie Mistakes
It is always an advantage if you have some experience before you start trading binary stock options. Fortunately, there are demo accounts offered by reputable binary brokers that allow you to safely experiment, make predictions, and trade with real data and virtual currency. This way you can familiarize yourself with binary options trading and gain experience with the platform offered by the broker.
Our guide How to Make Money on Binary Options is easy to follow, and you can make money by trading binary options; this happens every day. You need to fully understand the risks and factors involved in binary options trading in order to consistently make profits.
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