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Binary Options: Learning the Basics

Binary options are a financial option that has long been around, though its popularity can only be traced back to just as recently as the global rise of the now-ubiquitous internet.

These days, anyone hoping to find good investments that require minimal time, effort, and money have so much financial options to choose from. Tales of those who got rich off Wall Street trading stocks, as well as those who indulged in other similar financial activities have now become all too common.

The proliferation of alternative ways for people to invest have somehow given everyone more opportunities to maximize their earning power. Gone are the days when the only way to make huge money was to start from scratch and put one’s nose to the grindstone.

Somehow, the technological evolution have given men the option to work smarter, rather than simply to work hard — which is what many were accustomed to doing, right before technology started changing many things.

Binary options are one of those financial tools that can help people gain so much — even just by working a little.

How Binary Options Work

In a nutshell, binary options are basically trading — or banking — on the price fluctuations of different assets in the global market. But while this option exhibits a lot of similarities with other forms of options trading, it differs in such a way that its risk profile and payout structure do not operate in the same way as any of the others.

Also known as fixed-return options, binary options touches on trading based on commodity, currency pairs (Forex), index, and stock markets. Like many other financial options, binary options come in different types. The most common of these are the High-Low options, as well as the Call and Put options.

High-Low Options

The High-Low option is the most common type of binary options that there is, and in this type, trading is always based on a familiar question: “Will a certain commodity’s price increase or decrease during a specified expiry time?”

If the trader believes the answer to the increase question is a ‘yes’, then he can buy the option. If he thinks it's a ‘no’, then he can opt to sell the option. The deal basically revolves around a ‘wager’ that the traders ‘put’ on the possible increase or decrease of the price of a commodity during a specified time.

In this option, the gravity of the price increase or decrease is irrelevant. The price could either increase or decrease in the tiniest, nearly irrelevant increment, or it can jump really high or fall extremely low — but the only thing that matters is whether or not the price has, in fact, increased or decreased, and if the trader has predicted that correctly.

Call and Put Options

Another common type of binary options is the Call and Put option. In this type of option, a trader either buys the Call (high) option, if he believes that the price of his chosen asset is about to go up, or buys the Put (low) option if he thinks the price of the said commodity is about to go down instead.

In this type of binary option, there exists what is called a strike price — which is the price of the commodity at the time when the trader entered the deal, indicating the price to be used as an index or reference to whether or not his asset price prediction was, in fact, accurate.

Binary Option vs Forex Trading

Theoretically, binary options play a hand in asset pricing, as the tool itself as well as the financial rewards tied to it basically stem from asset price prediction. It’s highly comparable to Forex, which is another financial option that operates similar to binary option.

Forex trading, however, requires not only of the investors to predict which way the money is about to go, but also which specific time it's going there — making the chance for the investors’ trade to expire in the money far more complicated. Binary options trading, on the other hand, follows a much simpler procedure.

In binary options, what traders basically need to do is simply to predict whether a certain commodity will be at a certain price during a certain time. Unlike Forex trading, predicting time isn't something that needs to be done in this type of financial option.

Another difference is that trading in binary options isn't what many would call an “open-ended deal”. Traders in this financial option have all the power to choose the expiry time of whichever deals they decide to take.

Getting out of a deal that one may deem too risky isn't much of a problem, either, as traders can choose to sell their option practically anytime they want to.

Is Binary Options for You?

Like all other financial tools, trading in binary options also poses a degree of risks. The chance of earning money from the trade is just about as thick as the chance of losing it.

But then again, business will not be business without the risks — for even the simplest moves and decisions in business will always entail a certain degree of risk.

Learning to make calculated risks, however, will make trading far easier and a lot less risky.

Binary options can be a great way to trade and invest money, but it's not without risks, and it does not come without the quintessential requirement of learning. While the trading process itself do not require much time and effort from its investors, having the time and patience to learn the ropes of binary option is one important factor to consider.

Learning the ropes of the trade might require potential investors to go through hours upon hours of studying the trade’s literature and strategies, and it will often take a lot of patience and a certain level of experience to ultimately get the hang of this otherwise simple financial option.

With the right amount of curiosity, patience, and determination, binary options trading can be a really great financial option to consider.