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What is Binary Option

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When it comes to trading, investors and traders usually have quite a few strategies up their sleeves. Binary option trading is one such strategy. With the help of this strategy traders and investors can theorize the price movements of various assets without owning them. Here, we will delve deeper into what is binary option, the intricacies of this strategy and how they work along with the many advantages they offer. 

Binary Options Trading - An Overview  

Binary options are, like other options, financial derivatives. Here is an overview of what binary options trading is all about: 

  1. Binary options trading authorizes an investor or trader to make all-or-nothing wagers

  2. These wagers can be made on events and asset price change

  3. This method has gained popularity in recent years. 

  4. Binary options trading is also considered to be a risky way to invest by US regulators

  5. They believe that such trades are closer to gambling than investing, making them more suscipltible to frauds and losses.

  6. Binary options are dependent on “yes” or “no” outcomes and that is where they get their name from. 

  7. When a binary option expires ‘in the money’, traders get a payout 

  8. When a binary option expires ‘out of the money’, they lose the payout. 

  9. It was In 2008 that the US Securities and Exchange Commission (SEC) approved listing binary options on exchanges. 

  10. After this move, the Chicago Board Options Exchange and the North American Derivatives Exchange (Nadex) also decided to offer standardized binary options to retail traders.

Working of the Binary Option 

Listed below is a brief of how binary options work:

  1. Like other options, binary options also have an expiry date and time. 

  2. Upon the expiry of the binary option, the price of the underlying asset or event must be on the correct side of the strike price 

  3. The side will of course depend on the kind of trade taken 

  4. When this happens, the trader makes a profit.

  5. A binary option gets exercised automatically

  6. This means that any gain or loss gets credited or debited to or from the trader's account upon the option’s expiry. 

  7. Essentially, what this also means is that a trader, when investing through binary options,  either receives a payout or loses their entire investment.

Comparing Binary and Vanilla Options   

Listed below is a comparison between binary options and vanilla options.

Aspect

Binary Options

Vanilla Options

Potential for Ownership 

Binary Options do not provide ownership of the underlying asset to the trader/investor

Vanilla Options provide potential ownership of the underlying asset to the trader/investor

Risk Exposure

In Binary options, the risk is limited to the investment made by the investor/trader

In Vanilla Options, the risk exposure is fixed

Payout Potential

Binary options provide a fixed maximum payout to investors/traders

The potential for profits in vanilla options is dependent on the price movement of the underlying asset

Regulation

Binary options are usually traded on unregulated platforms leading to higher chances of fraudulent behaviours

Vanilla options usually trade on regulated exchanges in the US and follow the market regulations set down in the country

How to Trade with Binary Option   

Below are the steps to help investors trade with binary options:

  1. Choosing the Right Broker: 

    • The importance of having a good stockbroker cannot be emphasised enough

    • Traders need to do their research and look for reputed stockbrokers who trade in binary options. 

    • The broker must be registered with the regulatory body of the country the trader is trading from

    • Any stockbroker who is not registered could potentially be trading illegally. 

  2. Build a Trading Strategy: 

    • Then building a trading strategy, it must help investors decide the markets to buy contracts from

    • Other than this, traders should include the amount they want to put in, the expiration times, and the type of binary options they want to trade.

  3. Open a Live Trading Account: 

    • Now, to start, first, open a live trading account with the stockbroker of your choosing

    • To do this, traders are expected to provide further personal details, proof of identity, proof of residence

  4. Account Funding: 

    • A minimum deposit is often required to start trading. 

    • This amount varies from one broker to another.

    • Once this need has been fulfilled, investors can begin trading

  5. Monitor and Adjust Trading Strategy: 

    • Monitoring trades and the market constantly is important 

    • This helps traders adapt their approach according to changing market conditions.

Example of Binary Option   

Here’s an example of a binary option to help investors understand the strategy better:

‘In the money’ situation

  1. Let us assume that a binary option's entry price indicates the potential profit or loss

  2. Here, the options can either expire at $100 or $0 

  3. Now let us suppose that the stock of Company A is trading at $64.75. 

  4. Here, the strike price of a binary option is $65 and expires the next day at noon 

  5. The option is available to the trader at $40. 

  6. Now if the stock price goes before the strike price of $65, the option expires ‘in the money’ 

  7. This makes the option worth $100. 

  8. The profit that the trader makes here thus equals $60, i.e. $100 – $40.

‘Out of the money’ situation

  1. In another case, the option expires while the stock price is below $65 

  2. In this case, the trader loses the $40 they bought the option with 

Fraud Risk Associated with Binary Option  

Below is a list of some of the frauds associated with binary options:

  1. A lot of binary options platforms do not operate according to the rules of the regulated financial markets. 

  2. As a result, such a lack can result in a higher risk of fraud 

  3. Many brokers trading in binary options might also not be registered with the regulatory body of your country

  4. It is important to research well and pick a broker who is reputed and registered with the regulatory body

  5. If the binary options trading does not go in favour of the trader, they end up losing their entire investment. This ‘all or nothing’ wager can prove to be potentially difficult for traders to handle sometimes

Conclusion 

Like other options, binary options also belong to the financial derivative family. Doing justice to its name, binary options either provide investors with a fixed payoff or nothing at all. Traders bet on whether the price of an underlying asset or event will go beyond or below the strike price of the option at a specified time. This leads to a straightforward outcome: a predefined profit or a total investment loss.

Disclaimer: Investments in the securities market are subject to market risk, read all related documents carefully before investing. This content is for educational purposes only. Securities quoted are exemplary and not recommendatory.

For All Disclaimers Click Here: https://bit.ly/3Tcsfuc

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Frequently Asked Questions

What is the Binary Option?

Answer Field

Like other options, binary options also belong to the financial derivative family. Doing justice to its name, binary options either provide investors with a fixed payoff or nothing at all.

When is the best time to trade binary options?

Answer Field

According to surveys by traders, the best time to trade binary options is between 6:00-12:00 GMT and 18:00-0:00 GMT

Are binary options considered high risk?

Answer Field

In Binary options, the risk is limited to the investment made by the investor/trader

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