One of the most important advances in the financial markets is the development of binary options. They belong to the class known as “exotic options” but in reality they are pretty simple. They have an expiration date, a strike price and traders have to make their positions – will the option expire at a higher price than its current level, or will the price expire at a lower level?
Binary forex options vs. spot trading
This is the general idea behind binary option trading and binary forex options work the same way. You buy a binary options contract for, say, $75, and you can earn a fixed amount of income if the price expires at the direction you chose. On the other hand, spot trading allows you to purchase contracts for as low as a $100 and you can earn as much as $500.
In spot trading, traders have to know the exact price that the currency pair will take in order to gain from the investment. On the other hand, in binary forex options only requires the trader to predict the direction that the price of the currency pair will take. In spot trading, traders will have to take advantage of the fluctuations of the market price, hence they need to make use of 5- or 30-minute charts and short term technical analysis. On the other hand, binary forex options traders need to know the fundamentals, macro data, currency rates and the patterns they are forming.
Advantages of binary forex options
Because binary forex options only require traders to determine the direction that the price will take for a certain period of time, it is less risky than spot forex trading. If you predict the correct direction that the price of the currency pair is going to take, then you can earn a fixed amount of income for every contract. The downside to this is that traders cannot earn more, but the bigger advantage is that they lose only what they paid for the contract. On the other hand, spot traders have to increase their risk if they want to earn more, and for many new forex traders, they can actually lose all their earnings this way. Hence, the biggest advantage of binary forex options is that it has less risk.
Another advantage in binary forex options is that you don’t need to deal with brokers. There are no requites and you don’t have to worry about getting stopped out while trading. Also, since the payout is much higher than what you risk, binary forex options can be hedged with another forex investment.
How to trade binary forex options
All binary options have expiration times. Some are hourly, daily or even weekly. Many binary options contract pay out $100 (but purchase price can differ, depending on the binary option broker offering the contract) – that’s equivalent to 10 pips to a $100,000 investment. Say a spot trader goes short on the pair EUR/USD at 1.6750 at 9am, and buys a binary option at >1.6920 (a call option) offered at $20 and a daily expiration. It means that if the price exceeds 1.6920 at 9 am the next day, then the trader will be paid $100 on his account. On the other hand, if the trader focuses mainly on binary options and the price of the currency pair drops below the strike price of 1.6920, then the trader only loses the $20 used to purchase the binary options contract.