How Binary Options Trading Works

A binary options trade is a type of investment that makes a prediction. The prediction might be right or wrong, but there’s no in-between. The investor makes a bet that an asset will be either more or less than a fixed amount at a fixed time.

Gamble or Stock Purchase

Some people view trading with binary options as gambling while others consider it a basic stock purchase, according to Business Insider. The people who consider it gambling note that it’s making a prediction that leads to either losing money or getting a reward, making it a game of chance. However, some people note that this applies to any type of stock sale, and binary options brokers note the presence of third parties in the trading transactions as proof it isn’t gambling.

Price Indicators

Some people are concerned about the possibility of scamming that exists in binary trade options, according to Business Insider. Because each binary options trading firm establishes its own price indicators, it would be easy for the brokerages to manipulate data in their favor. While there’s quite a bit of risk involved with the practice of this type of trade option, there’s also enough potential for reward that it remains popular with some investors.

Low-Skill Trading

While some forms of stock trading require a bit of advanced knowledge to do well, binary options are popular with low-skilled traders because they’re so easy to understand. High-low and fixed-return options are the ones traded the most often. These offer access to stocks, commodities, indices and the foreign exchange. These options have clearly stated expiration dates, times and strike prices. A good guess provides a fixed payment amount, and a bad one leaves the bidder with nothing, according to Investopedia.

Bullish or Bearish

A trader in binary options tries to put a call on bullish stock, commodities, indices and currency pairs, according to Investopedia. If the market is bearish, the binary options traders place a put on them. If the market trades higher than the strike price when the expiration time is reached, the trader who placed a call makes money. If the market closes below the strike price, the trader who placed a put on the binary options makes money.

Proceed With Caution Outside the U.S.

The Financial Industry Regulatory Authority (FINRA) warns investors to proceed cautiously with binary options trading if non-United States companies offer them as trading platforms, according to Investopedia. These options are often named to imply they’re an easy way to get rich quickly. While these types of trades may be viable for hedging or speculators, traders should understand the risks before proceeding.