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Binary Options – what are they?

Binary Options – what are they?

In the world of investing, a potential investor has a wealth of resources, tools, and methods at his or her disposal. This was not always the case, but with the advent of the Internet and the advanced technologies and increasingly-sophisticated methods in use today, trading is more powerful than ever before.

One of the hottest trends in trading today is found with binary options – an exciting way to make money based on market movements. This form of options may seem exotic to some, and is not as commonplace as other methods of option trading, but it is quickly catching on, especially with online trading platforms.

What Are Binary Options?

An option is basically a contract between two (2) parties to buy or sell an asset at a certain price during a certain period of time. When it comes to currencies, an option is a contract to buy a particular currency at a particular price by a particular time, say, EUR at 1.3 USD before the option expires on January 30.

A binary option has two (2) possible outcomes: a fixed payout amount or nothing. Other names for these include all-or-nothing options and digital options, particularly in the forex option community.

How Binary Options Work

Binary options operate very similarly to regular options. When you invest in a binary option, you are basically taking a position for or against a particular outcome. If you meet that outcome, then you receive a fixed payment; if you do not meet the outcome, you lose the amount invested in the option.

For example, let’s say there is a binary option that pays out 85% and states that EUR/USD will close above 1.3000 by January 30. If you take the call position, you believe that this outcome will occur; if you take the put position, you are betting that it will not occur, in other words, EUR/USD will close below 1.3000 by January 30.

Most binary contracts pay out around 70% – 90% of the trader’s investment amount; so, if you were to invest $200 in the EUR/USD binary option mentioned above which pays out 80%, you could receive a potential gross profit of $160.

As you can see, binary options are extremely attractive methods for those who want to earn a lot of money without a lot of risk.

There are three major differences between binary options and regular (known as vanilla) options:

Vanilla – Expiry Time: Monthly or quarterly expires.

Binary – Expiry Time: Expires at the end of the hour, day, week or month.

Vanilla – Payout: Depends on the magnitude of the asset price change.

Binary – Payout: Fixed on purchase of option: 65 – 95% if in-the-money or 10 – 15% if out-of-the-money.

Vanilla – Execution: Can be executed at any time up to the expiry time.

Binary – Execution: Cannot be exercised before the expiry time.

These differences have several consequences:

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Binary Options Types

Binary Options Types

FROs or Fixed Return Options are otherwise known as binary options / digital options / financial betting and under this option, the amount to be returned to the trader is fixed. All that the trader needs to do is to predict the direction the price of the instrument or asset will move to and has to make calculations if the price will be shooting up or climbing down after taking a careful analysis of all the factors determining the price. The binary option is said to be one of the most favored and simple methods of trading since the traders are aware in advance about the profit or loss they would incur and the risk is less.

Any trading type will have two (2) options: “call option” and “put option”. Call option is the right the trader enjoys for getting a contract for an amount that is determined in advance. The put option is the right the trader will get for making a sale of the contract at an amount that is again finalized in advance.

Binary option has got many types and each type is distinguished with the help of a few conditions which make the option valid or invalid. The payout amount that is to be finalized by the trader and when all the conditions of the trade are completed, the trader will be getting the amount that is specified in the contract. There are many types of binary options such as

The One Touch option where the trader agrees that if the asset or currency is able to be traded upon at a given specific rate, then he would be getting the profit that is again set in advance.

The rate at which the currency is traded is called the trigger. When the currency is able to reach the trigger value, the trader will get the specified payout amount. Thus the trader is quite knowledgeable about the amount he would be receiving in case of the currency reaching the trigger or the loss he would be incurring in case of a failure.

The next option is No Touch under which the trader undertakes to claim the profit only when the currency rate reaches the trigger as specified in the contract within the time frame set in the contract. The trader needs to note that if the trigger is much higher, then there is every possibility of the currency not reaching the trigger and he would incur loss or less profit.

The Double One touch option is where the trader is permitted to fix two triggers for the currency and if either of the trigger is reached, the trader gets the profit. This option is availed only when the trader is very optimistic about the market showing an upward trend but is not very sure which direction the market would move. The Double One touch option is almost like the long straddle option or the strangle option available.

The Double No Touch option is exactly the opposite of the double one touch option. Here the traders would assume that the currency would not be able to reach any of the two triggers that they fix. When the market is not very encouraging, this option is taken by the trader. The option works out profitable when there will be a move towards consolidation in the market.

There are many tactics that the traders apply for earning good profits in trading and often they look for combination of various options for earning good profit and less risk.

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