Binary options — what are they, and how do they work?

Binary options — what are they, and how do they work?

Binary options, as one of the instruments present in the financial market, are gaining popularity. The ever-increasing interest in forex investments and the growing availability of online trading platforms for binary options trading will result in an increasing number of investors interested in investing their capital in this type of stock. What are binary options? What are their types? What is investing in binary options all about? You will find the answers to these questions later in this article.

What are binary options?

Binary options are a type of option — a derivative financial instrument whose characteristic feature is an asymmetrical payment profile. Their value depends on a particular underlying asset, which is often the price of a currency pair. The most popular currency pairs are: EUR / USD, GBP / USD, USD / JPY and USD / CHF.

Binary options are a financial instrument that allows investors to multiply their capital quickly. But, at the same time, they are burdened with a very high risk. As the name of the option — binary — indicates, they have only two possible solutions — the investor has correctly predicted the price of the asset and thus gained, or he has made wrong assumptions and consequently lost his capital.

What are the advantages and disadvantages of binary options?

Despite the apparent advantages, binary options are not without disadvantages. Although investing in them seems to be easy, you should remember the risks involved. Speculating whether the price of an asset will rise or fall does not require any specialist knowledge — that is why people with little understanding of the market often decide to invest in binary options.

However, with high potential profits comes the possibility of losing even the whole invested capital. Caution is also required by the practices of dishonest brokers, who, while advertising earnings from binary options, omit the accompanying risk of losing the funds. Please note that offering binary options to non-professionals is currently prohibited throughout the EU.

CALL and PUT — how do binary options work?

Understanding the basics — the idea and how binary options work — is essential to making successful investments involving them. An investor buying binary options speculates whether the price of a given asset at a certain time (at the so-called option expiration moment) will rise or fall. In addition, he can optionally determine the exact level of a given stock. If his prediction turns out to be correct, the broker will be obliged to pay him the invested capital together with an additional commission charged on it.

There are different types of binary options, among which the most popular are CALL and PUT options.

CALL options — bought by the investor when he anticipates an increase in the underlying asset price, for example, the currency rate.

PUT options — bought by the investor when he predicts a fall in the underlying asset price, for example, the currency rate.

Investing in binary options comes down to two basic models: the already mentioned CALL and PUT options. If the trader assumes that the asset price will rise, he should choose the CALL option. However, if he thinks the given asset’s price will fall, he should select the PUT option.

When the investor’s expectations concerning the increase or decrease in the underlying asset price do not come true, he loses the whole amount invested in the given option. In practice, he shall lose the invested capital if, for a selected CALL option, the underlying asset price at the moment the option expires is below the option strike price (the option expires in-the-money), and for a selected PUT option, the underlying asset price at the moment the option expires is above the strike price.

Binary options trading in the EU

Binary options trading is done through brokers and the investment platforms they offer. Investing comes down to the investors’ faith in the success or failure of a given option — this makes binary options one of the more straightforward yet riskier assets among investments.

On July 1, 2018, ESMA regulations imposed a complete ban on EU brokers from offering binary options to retail clients. As a result, brokers registered in the European Union cannot offer binary options to investors who do not have the status of professional traders.

In summary, binary options are financial instruments where the buyer speculates on the rise or fall of the price of a given asset over a specified period. However, controversial issues regarding the dishonesty of brokers and the risks of investing in binary options have led to a ban on trading them in many European countries.


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