The most simplistic way to begin is to ask ourselves whether we think a certain asset will be worth a certain amount by a certain time. For example: Will coffee be worth $1.12 a pound by 3:15 p.m. tomorrow? The answer being either yes or no is where the name, ‘binary option’ comes from: ‘bi’, meaning ‘two’. It also determines whether a trader will decide to make the transaction.
Binary Options are based on what are called, ‘underlying assets’, which are the products or things that give value to an agreement. For example, when dealing with trading in derivatives, as with binary options, the value of the contract comes from a financial instrument which is underlying, such as a stock, commodity or currency. Determining what value a trader thinks a particular underlying asset will have at a certain time will determine whether or not he or she makes the trade. It is a way to trade the price fluctuations which occur in the market.
In the scenario above as to whether a pound of coffee will be worth a certain amount at 3:15 p.m. tomorrow, the trader would make the trade if, in fact, he or she believed the price would be more than the proposed $1.12. If the trader did not believe it would make the agreed on price, then he or she could sell or simply not buy. The simplicity of the, ‘yes’, ‘no’ paradigm has made binary options a popular and simple financial asset for trading. Still, it is important to fully understand the system around which binary options are fitted.
TorOption broker provides on its site education, customer support and advanced security, as well as an innovative platform for trading. When considering trading in binary options, it is good to consider the pros and cons, as well as the market and the time frames in which you can consider trading. Although binary options are considered an ‘exotic option’, the risks, as well as the profits, remain capped.
If you decide that coffee will be worth more than $1.12 tomorrow at 3:15 p.m., and you want to trade, the price will always be between $0 and $100.00. The bid and ask price will vary slightly and will fluctuate until the offer expires. If you purchase the trade at $30 and coffee goes up in price tomorrow, you get $100. Every trade is a zero-sum game: you walk away with either $0 or $100. You either get what someone else put in or vice versa. The risks are calculated, but so are the gains. Traders can also purchase more than contract, if they should choose.
Traders determine what their bid and ask prices will be, based on the probability on whether the underlying asset will be above or below a certain value at a certain time. The closer the bid is to $100, the more likely it can be assumed that the seller believes the asset will be worth a certain price at a certain time. They are taking a slight risk, believing the binary option will expire at $100. When the price is set to $10, the seller likely believes the underlying asset will not be worth a certain price at the time set and is risking $90 in order to gain $10. When the price is in the middle, the seller may be unsure of the risk, and hoping to break even. Knowing the market and studying up, as well as having professional help can assist in successfully traversing the world of binary options.