Investing > Binary Options Trading

Binary Options Trading

This guide explains what binary options are, how they're traded, and which strategies are most successful.

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Looking to begin trading binary options? Then you’ll be happy to know that these exotic options are based on a simple yes or no premise.

This simplicity makes them popular with traders of all levels across the globe. While their popularity has also attracted some large-scale scammers to the market. 

In this guide, we’ll show you exactly how binary options work, and how to protect yourself from scams and fraud. Not to mention highlighting the pros and cons, fees, and most importantly, to help you reach your financial goals, you’ll need to find the right broker.

We’ll finish by taking you through some other key considerations to take into account before you get started. For example, choosing which market to trade binary options on, and discovering which platform will work best for you. 

Once you read our guide, you’ll be able to decide whether binary options trading are the best choice for your investing journey.

Overview & Summary

  1. Binary options are an exotic financial option where the payoff is either a fixed monetary amount, or else nothing at all. They’re called binary options because this is the only settlement possible. 
  2. The premise behind a binary option is simply will the underlying asset be higher than a particular price at a certain time – yes, or no.
  3. Binary options trading within the U.S is structured differently to binaries available everywhere else. Ultimately, the regulation differs from jurisdiction to jurisdiction. 
  4. While binary options trading is legal in the US, it does have the strictest regulations surrounding binary options which can make it more complex for both the trader and broker. 
  5. In some countries, binary options are considered a type of gambling, like in the UK for example. This has some notable benefits to it. The HMRC does not charge any taxes on profits earned from binary options. 
  6. Binary options outside the U.S have a capped risk and payout, and are offered by brokers as opposed to the exchange directly.
  7. Unlike the stock or forex markets where slippage and price gaps can happen, the risk and reward are known from the outset which is a major advantage. 

What are Binary Options?

Binary options are an exotic financial option where the payoff is either a fixed monetary amount, or else nothing at all. They’re called binary options because this is the only settlement possible.

The premise behind a binary option is simply will the underlying asset be higher than a particular price at a certain time – yes, or no. Overall then, there is a stark difference between stocks and options.

With options, all traders do is trade based on whether they believe the answer to be yes or no. This makes binary options one of the simplest forms of financial assets to trade.

The simplicity of it has attracted and enticed a wide audience of traders of all levels to the financial markets. However, although it seems simple, it’s important to understand how exactly binary options work; which markets and the time frames you can trade in; taxes and regulations; and the pros and cons of binary options. 

Binary options trading within the U.S is structured differently to binaries available everywhere else. Ultimately, the regulation differs from jurisdiction to jurisdiction.

To help you get some barings on what this will mean for you, we’ll discuss both binary options and regulations within the U.S, as well as outside. If you’re considering speculating and hedging as an option you should fully understand both potential outcomes for these options.

Traders can profit from price fluctuations in numerous markets with binary options, but you will need to understand the potential risks and rewards of these misunderstood and controversial financial instruments. Binary options and traditional options trading have little in common, they have different fees, payouts, risks, not to mention a completely unique investment process and liquidity structure.

To help you benefit from binary options, in this guide we will:

  • Tell you where they are traded and how you will be protected
  • Show you how binary options trading works
  • Outline the steps you can take to become a binary options trader

Is Binary Trading Safe?

The structure and regulation of Binary options differ from region to region. A binary options trader in the U.S will be protected by different regulation to a binary options trade in the UK.

This is mostly due to the fact that 1) It’s a global market and there is no one regulatory body that could possibly regulate the entire market, right now. 2) The binary options market has grown very quickly in the past few years meaning that governments are still trying to figure out what is best. This has resulted in some regions imposing harsh restrictions and penalties, while others have imposed no restrictions.

Let’s start by giving you a quick outline of these differences by region, before explaining exactly how they work.

Binary Options Trading in the US

While binary options trading is legal in the US, it does have the strictest regulations surrounding binary options which can make it more complex for both the trader and broker. The financial market in the US is regulated by the Commodity Futures Trading Commission (CFTC) and the Securities Exchange Commission (SEC). Financial service providers must register with these authorities to receive a license to operate in the country.

They also impose harsh penalties should a service provide not comply with any of their rules or restrictions.

Currently, the only legal binary options broker available to traders in the U.S. is NADEX as a result of the strict regulatory processes required to obtain a license.

There are no brokers based outside of the US, right now, that are licensed to operate in the US; though this does not mean that they are illegal because there is no law that states traders cannot use offshore brokers or prohibits brokers from accepting U.S traders as clients. Thus, US traders can avail of brokers outside of the US should they wish to do so.

A lot of these offshore brokers do have licenses within other jurisdictions which can be strict and comply with the standards and regulations enforced by the CFTC. As a result, the CFTC will often allow them to be present even without obtaining a license because they comply with the rules and regulations that protect traders.

Binary Options Trading in the UK

UK citizens looking to trade binary options then you will need to obtain a license from the UK gambling commission. Brokers that are regulated by the Financial Conduct Authority (FCA) will offer you that added layer of protection. 

You should note, some brokers will advertise that they are a member of the FCA on their website when they are not. For this reason, it’s important to go straight to the FCA’s financial services register to check for yourself.
As with everything, Brexit caused some ripples to the binaries market.

Most prominently, the sterling has fallen in value. However, in terms of regulations there has been some repercussions for many binary brokers. Before, CySEC had an input in the UK’s financial regulations.

While MiFID 11 guidelines around binaries were going to be enforced in Europe now the UK will have complete authority to implement its own rules. That said, it might decide not to implement any because there is no requirement to

Binary Options Trading in Australia (and the Rest of the World)

The Australian financial market is run and regulated by the Australian Securities and Investments Commission (ASIC).

Brokers based in Cyprus and Israel are regulated by CySEC. In Dubai and the rest of the UAE, binary options are regulated by the Dubai International Financial Centre (DIFC).

Day trading is also available in Canada, South Africa, New Zealand,  India, Malaysia, Pakistan, Nigeria, Kenya, Indonesia, the Philippines, and Vietnam. Each jurisdiction has its own regulatory bodies governing the market and enforcing its own guidelines and penalties.

It’s important to know the regulation that applies to the jurisdiction your broker is in because it will determine the level of protection your money will be given should the firm go into bankruptcy, for example.

Binary Options Scams & Frauds

Binary options have a damaged reputation as a result of false advertising and cybercrime. Unregulated brokers have infiltrated the market offering quick cash, which have been fraud or scams.

For this reason, regulators are coming down harsh on financial service providers with regulations and restrictions. Binaries are completely legitimate , but those advertising “quick money”, cold call, or making celebrity endorsements should be avoided. 

So as a whole, binary options do not come with more risk, traders simply need to do their research and check where the broker is regulated to know what protections you will have in the event of fraud or scams, or should a company becomes insolvent.

Are Binary Options Gambling?

nother key distinction between regions comes with the much loved taxes. In some countries, binary options are considered a type of gambling, like in the UK for example. This has some notable benefits to it.

The HMRC does not charge any taxes on profits earned from binary options. And while the U.K was under pressure to reclassify binary options as financial derivatives, as we mentioned, they are no longer under any pressure to do so which is good news for traders.

With that said, if you rely on day trading binaries as your sole income, and are trading full-time, then you might be liable to pay income tax. You should make sure what exactly applies to you before you get to that stage.

In other areas, tax regulations on binary options varies greatly.  For example, in Germany and Japan the tax obligations are vastly different.

Therefore, before you get started trading binary options, we advise you seek some advice on what tax obligations will apply to you. You may be required to pay any of a number of taxes including, business tax, income tax, capital gains tax.

Can You Really Make Money with Binary Options?

Okay let’s talk about what you really want to know, for a minute.

Yes, binaries are dynamic and have a capped risk. But to make it a full time income you will need to listen to and use the information and suggestions in this guide first and foremost. Can you make a lot of money off trading binary options? 

You can if it’s done right. There is no doubt that binary options trading can potentially earn you a high profit, multiple millionaires have proved this.

To get to that point though, you will need the right broker, a strong strategy, and you will need to follow the steps that we will outline below. First, let’s take a quick look at the pros and cons of binary options trading.

How Do Binary Options Work? (US)

To understand how binary options work you will need to know three things; the underlying market, the strike price, and the expiry time. Once you understand these you will have the basics of binary options down.

Nadex Binary Options
NADEX offers a clear and explanatory video on binary options.

Let’s go through each part of a binary options trade:

When it comes to binary options you can only lose the amount you invest. This is why we say that the risk is capped.

Should you not want to wait until expiry, you can exit the trade and lock in your profit, provided it’s above the strike price, or limit your loss.

NADEX have outlined how binary options trading works with them:

  1. First, traders will pick the asset or event they would like to trade. Each one is based on an underlying market and the trade is based on the price movement in this underlying market.
  2. Secondly, choose a strike price that suits you. This is the amount you think the market will rise above or fall below at the expiry date/time.
  3. When you open a trade you will select the expiration day and time that you prefer. This will be the defining time in the trade and the value of your binary option will be known.

Example of a Binary Options Trade 

Binary options offer traders an option to trade markets with a limited amount of risk, and limited profit opportunity.

For example, we could ask whether the price of gold will go over $1,150 today at 2pm?

If you believe that it will go above this then you buy it. If you think it will go below $1,50 by this time you should sell it off. A binary option will always be priced from $0 to $100, and there is a bid and an ask price, as there is with other financial markets.

The binary option above might trade at $30.50 (the bid) and $34.50 (the ask) at 1pm. To buy the binary option at this time it will cost $34.50 and if you sell it then you will get $30.50

Let’s look at what would happen if you buy it at $34.50. If the price of gold is above $1,150 at 2 pm then your option will expire and it will be worth $100.

This means you will make a profit of $100-34.50=65.50 (not incl. fees) – you’ll be ‘in the money.’ However, if at 2:00pm the price of gold falls lower than $1,150, the option will expire at $0. If this happens, you will lose the $34.50 that you invested – you’ll be ‘out of the money.’

The bid and ask price will fluctuate continuously until it expires. You can close your position at any stage before the expiry time and lock in the price to give you either a profit or a loss, in comparison to letting the option expire out of the money.

Options Price and Expiration

In the end, all options settle at either $100, or between $0 to $100 should your speculation be true, and $0 if it’s false.

Therefore, every binary option will have a total potential value of $100, and it’s a zero-sum game, baby – What you earn, someone else will lose, and what you lose, some else will earn.

Each trader has to hand over the capital for their side of the bargain. In examples we just looked at, you bought an option for $34.50, someone sold that option to you. Your risk is capped at $34.50 if the option falls to $0, which means the trade will cost you only $34.50.

The seller has a capped risk of $65.50 should the option settle at $100. (100 – 34.50). Traders can buy several contracts if they wish. Take this example for instance:

NASDAQ US Tech 100 index > $2,424 (10 am)

The bid is $44 and the offer is $49. If you speculate that the index will reach higher than $2,424 at $11 am, you buy the binary option for $49, or place a bid at a reduced price in the hopes that someone will sell it to you for that price. If you propose the index will be lower than $2,424 at 10am then you should sell at $44, or place an offer over that amount and in the hopes that someone buys it off you.

If you sell at $44 because you believe the index will fall lower than $2,424 by 10am, you can also sell (or buy) multiple contracts if you like the trade a lot.

Nadex Learning Center
The figure above shows a trade to sell 4 contracts at 48.75. Nadex automatically calculates the maximum loss and profit when you make an order, or a ticket.

U.S. Versus Foreign Binary Options

Binary options outside the U.S have a capped risk and payout, and are offered by brokers as opposed to the exchange directly. These brokers make a profit on the difference between what is paid out on winning trades and what they make from losing trades. 

These brokers profit from the difference between what they pay out on winning trades and what they collect on losing trades. Just like the U.S trades, there is an expiration time.

Brokers outside of the U.S cannot solicit US citizens unless they register with the regulatory bodies in the U.S, the Commodities Futures Trading Commission (CFTC) or the Securities and Exchange Commission (SEC).

High-Low Binary Option

Say you buy an index call option that is trading at $1,800 so, you wage that the index’s price at the expiration time goes above that number. Since binary options can have various time frames, ranging from minutes to months, you choose a time or date that supports the analysis you’ve done.

You decide to go with an option that expires in one hour, and pay out 70% + of your original investment if the S&P index goes above 1,800 at that time. Otherwise you lose the whole stake. This is all quite similar to the U.S example. However outside of the U.S, the minimum and maximum investments will vary greatly depending on the broker you choose.

If you invest $100 on the call that expires in 30 minutes, the price at the expiration date will determine whether you make a profit or a loss. In some cases, the price at expiration might be the last quoted price. Again, the difference here is that outside the US, the broker will outline its own expiration price rules.

For this case let’s assume the last quote on the S&P 500 was 1,800 before expiration. Thus, you make a profit of $70 and keep your original investment of $100. If the price ends under 1,800 you lose your investment of $100.

If the price expires on the strike price, it is not uncommon for the trader to be returned their original investment, although different brokers apply different rules. The original investment or profit is added to the traders account automatically when the position closes.

More Binary Options

We’ve just discussed a standard high-low binary option – the most popular type – outside of the U.S. With international brokers, you will typically be offered more option types, too.

Other binary option types include, “one-touch” options. This means the traded instrument must touch the strike price once only to earn a profit. A target is set above and below the current price, and traders choose which target they predict will be hit before the set expiration date and/or time.

In other cases you might come across a “range” binary option. With this, traders select a price range that the asset will trade within until the expiration.

If the price stays within the range traders will receive a payout. If it goes outside the range the original investment will be lost.

As binary option trading grows and becomes more popular with traders, brokers are offering more products to stay competitive, boasting anywhere from 50% up to 500% payouts. Although the requirements and product structures may change, the risk and reward is always set out from the beginning, enabling traders to potentially earn more than they could lose. That said, when an option has a 500% payout it tends to be structured in a way that makes the probability of winning it very low.

Unlike trading in the U.S, some (not all) international brokers allow traders to leave positions before the expiration. When you exit a trade before expiration you usually will receive a lower payout or only a small loss without losing your whole investment.

The Upside and Downside

As you might have gathered by now, unlike the stock or forex markets where slippage and price gaps can happen, the risk and reward are known from the outset which is a major advantage. Secondly, there are only two outcome possibilities: you can win a set amount or lose a set amount and typically, you won’t be charged any commissions or fees. Another big advantage for beginners, the structure is simple and you just make one call: will the underlying asset increase or decrease in price?

On top of all that, you won’t have to worry about liquidity because you won’t own the underlying asset and brokers offer countless expiration times/dates strike prices, which is not too bad at all! Binary options are accessible and traders can access numerous asset classes at any stage while the market is open. Even better, more products are being added so that brokers can stay competitive.

The other side of binary options trading is that as the reward is always lower than the risk, and traders will need to be right a high percentage of the time to make up for and profit from the inevitable losses.

With that, the gain is always capped. No matter how much the forex pair or stock moves in your direction, a binary can be worth at most $100. Buying multiple contracts can help you reach a higher profit point from a predicted price move.

While the payout and risk does fluctuate from broker to broker and instrument to instrument, one fact remains true: when you lose, you will lose more than you could make when you win.

Apart from the typical binary options, you might give payouts where the reward might be bigger than the risk but it will be more difficult to win.

Finally, traders outside of the U.S will be trading in an unregulated marketplace with little government involvement should a discrepancy arise. Although brokers tend to use external sources for quotes, there is still a chance a trader could find themselves victim to scams or fraud.

Pros

  • The risk is capped
  • Higher than average returns
  • Payouts are outlined from the outset

Cons

  • Profit is capped
  • Limited types of binary options for U.S traders
  • Unregulated market for traders in the U.S

How To Start Trading Binary Options

Happy with those odds and think binary options trading might be a good fit for you? Here are the steps you can take to become a binary options trader. In these, we’ll delve a bit deeper into the fees you can expect, platforms, markets, trading volatility, and more.

1. Find a Broker

Finding the right broker is one of the most important choices you will make. Your broker should meet all your needs and goals and overall optimize your trading performance. As we mentioned, traders in the U.S will have the option of one broker only, Nadex.

Traders around the rest of the world have a lot of options. Perhaps even too many. Here’s what you should look out for to help you find the best brokers for options trading.

Fees

If you are, or are planning to be, a high-frequency binary trader then the fees and commissions you pay can really add up. In order to maximize profits you will need to find a broker that offers competitive and transparent fees. Just keep in mind, you will pay different amounts for different asset classes.

Nadex contracts will cost you $0.90 to both enter and exit a trade. This fee is capped at $9, so if you were to buy 16 lots the maximum fee you will pay will still be $9 to enter and exit.

If you decide to hold your trade until the expiry time/date and end up in the money, the exit fee will be assessed at that time. But if you hold your trade until expiry and end up out of money you won’t be charged a trade fee.

Traders should also consider eOption as a low fee options broker with a huge selection of investment types. eOptions charges $0.10 per contract and no per-leg fees. Auto trade commissions for options will cost you $2 plus $0.10 per contract.

However, there is a $1.99 per-trade fee for options, which makes this pricing structure better for those trading 4 contracts or more during one trade.

Deposit

Another thing to take into consideration is the broker’s minimum deposit. This varies greatly from broker to broker. Some charge a $0 deposit for binary trading while others might charge a deposit of $50, or even $100.

If you’re starting out with a low budget then you can search for a broker with a $0 minimum deposit. Ally Invest offers traders $0 trading commissions and a $0 minimum account fee

Asset-Specific

Keep an eye out for brokers that specialise in specific assets. If you have one in mind then you are best off looking for a broker that focuses on that asset. You will more than likely benefit more from the brokers research, education and news feeds, not to mention getting access to the best option choices out there.

For example, trading binary stocks with Trading212 would suit if you’re interested in stocks.

Regulation

We spoke about this in more detail above but to reiterate, make sure to check that your broker is fully regulated by the concerned authority in its jurisdiction for example, the CFTC, FCA or ASIC.

Accessible and Reliable Customer Support

Unless you’re planning on being a completely hands-off investor and going with a top robo-advisor then you’ll want to know that you’ll have the help you need when you need it. Customer support can be another crucial aspect to your trading experience and an inaccessible or ill informed team can really slow you down, cost you time, and as a result, it will cost you cash.

Some brokers will provide a 24/7 customer support team through numerous platforms, a live chat, phone, and email, in multiple languages. 24option offers a reliable and responsive customer support team, however they cannot be reached over the weekend. E*Trade might be another good fit, this firm offers 24/7 customer support, so you will have support over the weekends too, and an average waiting time is about 1 minute.

Other Considerations

In order to stay competitive, lots of brokers will offer something extra to get you on board. You might be offered a free trading plan, or informative courses to help you build out a strategy.

Usually, brokers offer free educational content on their website so make sure to check that out first. Other brokers might offer free binary trading trials so you can check everything out before you commit.

You could also take advantage of brokers bonuses, strategy reviews, tips, and even free demo accounts to help you get an idea of the current trading environment and test out the brokers platforms.

2. Choose Your Market

Binaries can be traded on almost everything, including commodities, stocks, indices and forex. You can speculate on anything from the stock price of Facebook or the price of oil. We do advise you choose an asset that you understand, and that isn’t too risky to start off.

3. The Right Platform

Binary options offer you a gateway to the financial markets and will be where you spend a lot of your time. There are tons of trading platforms out there, so make sure that the one your choice is easy-to-use, or that you are up for the learning curve that comes with more advanced platforms. The platform should have all you need to make your journey as informed and easy as possible.

Interactive Brokers is our best overall platform for day trading. TD Ameritrade is another ideal option and is our top pick for desktop trading. Before you decide which to go for, make sure you check out our top 5 platforms for day trading so you can conduct a thorough comparison of each.

Binary Options Trading Apps

With technologically advanced gen Z now beginning to infiltrate the market, mobiles and tablets are becoming more and more an everyday part of trading. This also means that brokers are working harder to make them equally as good as its desktop counterpart. Right now though, the software for trading binary options varies significantly.

If you’re planning on making an app a part of your experience then it will be worth your while checking whether a broker provides cross-platform capabilities. Something else to keep an eye out for is the charting tools you’ll be using on your Android or iOS device. IQ option has grown immensely in recent times and offers advanced mobile apps for both apple and android devices.

4. Choose A Time Frame for Your Option

If you’re looking for some short-term trades then you will probably be looking at the 30 seconds to 1 minute times frames nearing the end of the expiring times. 

Nadex binary options expire per hour, day or week. Per hour time frames enable you to gain an established return, even in a quiet market, if you make the right estimate.

Daily options naturally expire at the end of the trading day. These are most useful for day traders or anyone looking to hedge other stock or commodities or forex against the day’s movements.

📈 Are you a day trader? See our top day trading software report to boost your gains.

Weekly options then, expire at the end of the trading week. These are most suited to swing traders during the week and day traders as the option reaches its expiration time in the afternoon on Friday.

Lastly, event-based contracts expire post the news release related to the event. For this, all trader types move into position well ahead of, and up until, the expiry.

5. Choose the Size of Your Trades

You should balance options trading price movement with the volume. What we mean here is that although more trades could potentially earn you more profit, we advise you make less trades that are more accurate.

With that, look into a time that enhances and works with your trading style. Create a well thought out strategy that will both enable you to make sufficient trades,while also protecting your money from too much of a hit at the same time.

6. Choose An Option

You will have a range of options to choose from. Before you decide, think about how accurate you believe your prediction to be. Think about any risks, or factors that might cause your investment to become volatile, to give you the best chance of being successful.

Whatever you do, don’t just press a ladder trade because you want the biggest possible return, strategize by thinking about what the safest bets are. Once you’ve done that, simply confirm the trade and wait for the results.

The Bottom Line

Binary options offer a simple yes or no structure. Your potential profit or loss will be previously outlined and will depend on the price or buy or sell at, in addition to whether the option expires worth $0 or $100.

The potential profit and loss is capped, and you have the option to exit the trade for a fee at any stage before the expiry time/date to make a profit or reduced loss.

US traders will have the option of only one legal binary options trader, Nadex. Binary options trading is accessible and offers a simple structure but this doesn’t mean you will make some easy money. There will always be another person hoping for the opposite outcome as equally confident in their decision as you.

Don’t trade with capital you can’t afford to lose, and take advantage of a free demo account to get a sense of what lays ahead.

All reviews, research, news and assessments of any kind on The Tokenist are compiled using a strict editorial review process by our editorial team. Neither our writers nor our editors receive direct compensation of any kind to publish information on TheTokenist.io. Our company, Tokenist Media LLC, is community supported and may receive a small commission when you purchase products or services through links on our website. Click here for a full list of our partners and an in-depth explanation on how we get paid.

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