Binary Options 101 - Trading With Cautions

"Binary Options 101 - Trading With Cautions'' by Mas Dika

Stock trading is often confusing for new players in stock exchange markets. There are lots of terms and strategies you must be familiar with in order to be successful in the business. With binary options, you will get less trouble in getting involved in the transactions. Binary options are financial instruments whose predictions are based on the price of certain assets at a certain period. There are only two results generated by trading the binary options: the trader is paid off with some fixed amount, or receiving nothing at all. As there is nothing in between the two results, this system is called the binary options. The fixed results generated by this system make binary options also called as Fixed Return Options (FROs), digital options, and all-or-nothing options.

There are several terms generally used in trading the binary options, among others are:

- Asset

Instead of trading real assets, options trade underlying assets. The assets can be in the form of a security or contract transferable or tradable in financial market. These assets may include but not limited to stock assets, currency, commodities (e.g. oil and gold), and market indexes (e.g. NASDAQ and FTSE100).

- "Call"

When traders predict that the asset price will be higher upon expiration, they will make the binary call option.

- "Put"

This step is performed when traders estimate that the asset price will be lower than the strike price (the price when the transaction is made) upon expiration.

- "In the money"

When you make the Call option and your asset price is higher than the asset's initial price, you are in the money.

- "Out the money"

On the other hand, when you make the Put option and your asset price is higher than the strike price, you are out the money.

- "Extend"

The "Extend" allow you to extend the binary options' expiration time. This choice will benefit you especially when you know that in certain condition you will gain the profit from your investment.

- "Close"

The Close option helps investors gaining more profits or avoiding huge loss depending on the trading situation. For instance, if traders realize that they have made the wrong choice, they can use the option to limit the losses on the investment. On the other hand, if the traders are positive that they have made the right decision, they can cash in the profits from the investment.

- PIP

PIP or price interest point is financial measurement used for evaluating the spread between two currencies. This measurement is commonly used in the foreign exchange market. In foreign exchange trading, there should be at least the difference of 4 to 9 pips s that the investors can gain profit. Within binary options system, only one pip higher or lower in the asset price is enough to determine the loss and gain.

Binary options trading offer high risks to investors as they will be left with nothing if the result does not meet the expectation. As beginners have little to no experience in this field, they might lose their investment. However, people who have been in the financial field for several years (be it in forex trading or stock market), will be easier to deal with the system.

All beginners who try to invest their money in this kind of trading must fully understand all terms and condition in the system. Apart from understanding the regulation of the system, these beginners must also understand the risk he or she will face by joining the investment market.

Binary options trading can be performed online with the web-based trading platform. Such platform provides the opportunity to investors to gain profit by predicting correctly the price movement of underlying assets such as currencies, stocks, commodities, and indexes. The options trading platform is commonly offered for free for short term investment. The asset invested in the platform cannot be bought or sold to close before the expiration. This trading method has been developing rapidly since mid 2008 with around 90 platforms existing as of the beginning of 2012.

Reputable brokers use the service of the well-known providers to offer the platform for binary options trading. Each provider has customized features, tools, and graphs to differentiate between one platform and another. Some of the mostly used platform providers among others are TradeSmarter Platform, Anyoption (used by Anyoption brokerage firm), SpotOption (used by Trader World and BBinary brokerage firm), Tradologic (used by OptionBit and BullOption brokerage firm), and Tech Financial Platform (used by 24 option and OptionFair brokerage firms).

However, the easy strategies and operation of these binary options do not pleasure all parties. Due to its simple trading system, people tend to consider binary options as gaming platform instead of an investment platform. The problem is worsen by the fact that investors do not have to acquire extensive knowledge about the stock market in order to be able to be involved in the trade.