What Are Binary Options?

What Are Binary Options?

By Varun Divakar

Binary options are exotic options which were typically available on OTC markets. But now, thanks to the information age, even a day trader or a private investor can trade these products. Before you go ahead and read this blog, a word of caution regarding the trading of these binary options. The Binary Options are not legal in India, but they are extensively traded in the UK, and are largely seen as something close to gambling by the rest of the trading fraternity. Binary options are not regulated by any exchange or government and carry a lot of risks.

Now coming back to the actual trading part, as the name suggests it is binary in nature, that is, binary options always provide two choices to the trader and pose a singular unique question. The question posed by each of them is different, and if you understand what that is then you will be able to trade it easily.

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If you can answer the question with a certain degree of confidence, then you have the eligibility to trade these exotics. Like the normal put and call options are known as vanilla, as in ice cream flavors, we have many exotic flavors available in options too. I have listed a few that are supported by trading platforms currently.

Types of Binary Options

High/Low Binary Option

This is a very simple binary option. All you need to do is predict if the market will go higher or lower by the time of expiry. And the time of expiry is usually your choice, that is, you can choose the expiry from a range of 30 seconds to a few days. I will explain this in detail with an example.

High and Low Binary Option

The above pic is taken from IQ option demo platform. Here you can see that the candle expires every minute (on the X-axis) and I bought a put worth $1 at the price denoted by the red horizontal line, and as you can see the candle closed at the white horizontal line, which is higher than my strike, resulting in a loss of the $1 that I had invested. Had my prediction been correct I would have received an X% as profit along with my initial investment of $1. This percentage profit is usually fixed and known before the trade is executed, this feature of knowing your risk enables you to balance your strategy allocation by adjusting your risk and reward in advance.

This is also the reason why people tend to apply Martingale or Inverse Martingale to their bets, to manage the risk. As it turns out, usage of Martingale is exactly the reason why Binary Options are considered as more of gambling than trading.

One Touch/No Touch

The question that you will need to answer before trading a One Touch option is:

“Will the stock trade the price X, before expiry?”

The No Touch option is an exact negation of this statement- “Will the stock not trade this price?”

Similar to what we have seen earlier in High/Low option, at the time of entering the trade you know the time to expiry and the return that you will be getting if your prediction is correct. The difference in returns between One Touch and High/Low is significant. The average return for a High/Low option is of the order 50% – 100%. But a One Touch option will have an average return of the order of 400%. Usually, the magnitude of the payout of a Touch option would depend on how far the strike price is from the current market level. The closer the point, the easier it is for the market to reach and hence will carry a lesser return, and for a no touch option the exact opposite is true for its return.

Range/ Boundary

As the name suggests, by buying this option you will be betting that the option would trade in a particular range. Like in the previous option types, the expected return would depend on how close the range is to the current market trading price. This option can be understood as a combination of two No Touch trades, that is, you expect the market to not trade one price above the current market level and one below. This is obviously a strategy that works best in low volatile conditions. When the directional prediction of the market which is needed in the previous two strategies becomes difficult then you can use this range option to play safe and make money. But unfortunately, only a few brokers, if any, offer this kind of flexibility.

There are many other complex binary options traded in the market. But there are very few that can be traded online. The above mentioned binary options are mostly available on many trading platforms. Let us look at a few of them.

Binary Options Trading Platforms

IQ Option

IQ Option

This is the user interface that would see once you register for the demo account. You also get $10,000 practice money in your demo account for paper trading. As you can see, there is no option for other options. This is one of the drawbacks of this otherwise very good binary options broker. You can only trade High/Low options and they don’t have the facility to trade Boundary or Touch options. I hope they will come up with those as well. Speaking about IQ Option, it started in 2012, offers a free demo account to help you get started, and the minimum deposit is just $10 for the Real Account, which is really cool.

Binary

This is a very popular site and provides many types of binary options. Just look at the screenshot below and you can see.

binary options website

Like IQ Option you do have a demo account or paper trading money available with this broker. You can try the virtual account to do a test run before you actually trade all these different types of Binary Options. There is another significant advantage to the options traded with this broker- You can set the trading time (entry time) aside from the expiry date. Even here, the minimum deposit is $10 and for e-wallets it is $5. There’s a 1.5% payout commission when you withdraw your money.

Another major advantage of this broker is that it supports various trading platforms, such as Binary Webtrader, Binary Bot, and Binary Next-Gen.

one touch option

This is the screenshot of a one touch option. If you are interested in binary options, this is a place where you can start and try out different types of options and figure out what really works for you.

With Binary you have an option to track your trade dynamically.

track your binary option trade dynamically

There are many other cool features worth exploring.

24option

For this broker, the minimum deposit amount needed is $100. The average payout rate is 88% and the maximum payout is 200%. The minimum investment per trade is $24.They have cool features such as a demo account and mobile trading. They also support MT4 trading platform.

24option

They have various binary options such as High/Low, One touch and Boundary available. They also have an online education center for traders to get acquainted with the various features and options. The minimum withdrawal amount is $100 and you can withdraw only in the same currency in which you have deposited. In addition, 24option charges fees that include 3.5% for credit cards, 2% for Skrill and Moneybookers, and $30% for bank wire. This is also one of the brokers that is certainly worth exploring if you are interested in binary options.

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Trading Strategies Using Binary Options

Speculating with No-Touch

In this strategy, we take advantage of the high returns on the Touch option. Usually, the average returns on a touch/ no-touch option are more than 100%, so we can buy both Put and Call at the same time and even if we get one of them correct, we will end up making money. I will explain this with an example. Let us say that the market is low volatile and not much of news is expected, so we go for a no-touch ( only if the payout is much more than 100%, should include your transaction as well) then we sell no touch for the next 5 minutes at a price that is not too far away. If the price is too far away your returns will also diminish. Alternately, you can try trading an uneven range. In this, let us say the stock is trading at 100 and you buy a no touch on 102 for the next 2 minutes, and you buy another no touch for 99 for next 2 minutes. So, the payout of the second binary option would be more than the first one. This is something you can execute if your view is bullish for next 2 minutes. This strategy is called a straddle.

Trading based on Candlesticks

For people who are familiar with Candlesticks patterns, know “The Hammer” very well, it is generally seen as a trend reversal signal. I have executed a simple strategy using the hammer. For those of you who do not know the hammer, it is a pattern that likes this:

hammer pattern

Using this pattern, I bought a no touch below the hammer’s low, I thought it was a safe stop. Post execution the trade returns seemed to be low, 7.4% as the barrier price or the no touch price is very far away compared to the market price. I have used a 2 minute expiry, so the payout is really low.

virtual trading account

Luckily for me, the market moved up and I picked up the 7.4% in 2 minutes. For people who want to learn and experiment on such strategies, try the virtual account.

The best part of this entire binary options trading is you can exit your position at any point you feel you have a decent profit. Just click on the sell at market option and pocket the profit.

exiting your position in binary option

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