Written by: Sophie May
Introduction
Binary Options are options with only two possible outcomes. If the condition of the contract is fulfilled, for example if the trader accurately predicts that the value of gold will go up over the next hour, then the trader receives a large payout. If the trader’s prediction is wrong, the payout is close to nothing.
Due to having just two possible outcomes, binary options are also sometimes referred to as digital options, or all-or-nothing options.
Payouts
When traders use on an online platform, they are normally trading cash options. This means that when the option finishes successfully, the payout is a predetermined cash sum, and the trader will see that their account balance increases by this amount. Cash payouts are set in advance at around 70% to 80% plus the investment amount for a winning trade, and 0-15% of the investment amount for a trade ending out of the money. In contrast, an asset-or-nothing option pays the holder the value of the underlying asset if the option expires in-the-money, and nothing if the trade is unsuccessful.
Where to trade
In the past, binary options could only be traded on an exchange. This is still possible, for example the CBOE (Chicago Board Options Exchange) offers binary options on the S&P 500 and the VIX, but it is no longer so common. From 2008 binary options have been available as over-the-counter options and since then a number of online trading platforms have made these options widely accessible to the public. Investors can trade online without having to download any specific software. This is now by far the most popular and easy way to trade binary options.
How it works
Trading platforms like Banc De Binary typically offer cash options, because they are simple to understand and and can be profitable for investors. If a trader on the platform believes that the USD/EUR will decrease over the next 30 minutes, it is then their decision how much to invest on the trade. If they invest $100 and the payout is 70%, they will receive the $100 back plus a profit of $70 if the asset does indeed have a lower value in 30 minutes time than it does now.