Binary options: what are they, how do they work and what are their risks.

A binary option is a financial product in which there is a “bet” on the price of a given asset at a given time. In this application, the investor can win or lose the money applied according to the direction applied.

Through these options, the investor bets on the maximum or minimum of a share, for example, after minutes, hours, days or even weeks. Some of these options are based on price variations that occur seconds after application.

Binary options receive this name because there are only two directions in which the request is made: “yes” to bet on the increase in the value of the asset, or “no” on the contrary.

Binary options are also known as digital options or fixed return options   , for  fixed return options  (FRO) in the North American market.

How binary options work

In Binary Options, the asset and the date it will change are determined. The application can only be done in two directions: to increase or decrease its value.

In case of adjustment in the direction of the variation, the investor obtains a fixed return, hence recognition as a fixed return option.

To apply in the sense that you believe that the price of the asset involved will vary, the operations are known as:

  • Purchase option: when the investment is made in the direction of an increase in the price of the asset;
  • Put option: when the investment is made in the direction of a decrease in the price of the asset.

A binary option for the stock of a publicly traded company involves betting on whether it will appreciate or lose value after a while. The option is applied according to the terms agreed with the broker, for the direction of the bet, the term and the profitability.

In addition to stocks, brokers can trade binary options that involve commodities, indices, or currency pairs on the forex market.

Example

For example, for March 1, 2019, at 1:00 pm, there is an option for the value of a particular share to be lower or higher than 2:00 pm on that day. A profitability of 70% is considered correct.

A  trader  considers that at that time the stock will have a higher value and decides to invest US $ 100 in the option for the price increase (call option).

If you’re correct, you can win $ 70 on your bet, plus walk away with the amount you applied. If you are wrong and the stock loses value on the stock market, you lose the $ 100 you applied.

How to invest in binary option

Binary options are available from specialized and authorized brokers. These brokers offer binary options to invest on their platforms.

The application in binary options must be done on one of these platforms with the money already deposited in the broker’s account.

Before investing in these options, find out if the broker is licensed and what is the level of trustworthiness among the traders who invest in it. Examples include Binary and IQ Option.

What are the risks of investing in binary options?

In binary options, you can see that when you invest in the wrong direction, you lose money. This happens due to the volatility in the price of the asset to which the option is related, both its value can increase and decrease.

Also, you need to take into account the brokerage firm where you are investing. Some may not work properly, causing great damage to the application. For this case, a good research on the brokerage firm you want to invest in is still worth it.

To reduce risks, the best strategy is to diversify your investment, never betting everything on the same asset. So, despite looking like a simple market, the best advice is to study and know how to apply.

Difference between traditional options

An Option, when acquired by an investor, confers the right to acquire or sell an asset that the contract implies. At the end of a period, it is possible to analyze whether you want to buy or sell said asset.

If the option is made to buy a share, for example, the investor may or may not acquire the asset in the agreed period.

In binary options it is different, since the investor does not acquire or directly engage with the option asset. In this case, only the price of the underlying asset is monitored and the profit is attributed to those who bet correctly.