Binary options: what they are, how they work and what are their risks

A Binary Option is a financial product in which there is a “bet” on the price of a given asset at a given time. In this application the investor can win or lose the money applied according to the direction he applies.

Through these options, the investor bets on the high or low of a stock, for example, after minutes, hours, days or even weeks. Some of these options rely on price variations that happen seconds after application.

Binary options receive this name because there are only two directions in which the application is made: “yes” to bet on the increase in the asset’s value, or “no” to the contrary.

Binary options are also known as digital options or fixed return options, for fixed return options (FRO) in the North American market.

How Binary Options Work

In Binary Options, the asset and the date on which it will change are determined. The application can be done only in two directions: to increase or decrease its value.

In case of adjustment in the direction of variation, the investor gains a fixed return, therefore, recognition as a fixed return option.

To apply in the sense that you believe the price of the asset involved will vary, the operations are known as:

Call option: when the investment is made in the direction of an increase in the price of the asset;
Put option: when the investment is made in the direction of a decrease in the price of the asset.

A binary option for the stock of a publicly traded company involves betting whether it will appreciate or lose value after a while. The option is applied according to the terms agreed with the broker, for the direction of the bet, the term and the profitability.

In addition to stocks, brokers can trade binary options involving commodities, indices or currency pairs in the foreign exchange market.

Example of binary option:

For example, for March 1, 2019, at 1:00 pm, there is an option for the value of a particular share to be below or above 2:00 pm on that day. Profitability of 70% is considered to be correct.

A trader considers that at that time the share will be at a higher value and decides to invest US $ 100 in the option for the price increase (Call Option).

If it is correct, you can win $ 70 with your bet, in addition to leaving with the amount you applied. If you are wrong and the stock loses value on the stock market, you lose the $ 100 you applied.

How to invest in Binary Option

Binary options are available from specialized and authorized brokers. These brokers offer binary options for investment in their platforms.

The application in binary options must be made on one of these platforms with the money already deposited in the broker’s account.

Before investing in these options, find out if the broker is authorized and what is the level of reliability among the traders who invest for it. Examples include Binary and IQ Option. You can too open a free binary options demo account to try binary option for free and learn about this market

What are the risks of investing in binary options?

In binary options you can see that when you invest in the wrong direction, money is lost. This happens due to the volatility in the price of the asset that the option relates to, both its value can go up or down.

In addition, it is necessary to take into account the brokerage firm where you are investing. Some may not work properly, causing great damage to the application. For this case, good research about the brokerage firm where you want to invest is still worthwhile.

In order to reduce risks, the best strategy is to diversify investments, never betting everything on the same asset. So, although it seems like a simple market, the best tip is to study and get to know in depth how to apply.

Difference between traditional options

An Option, when acquired by an investor, confers a right to acquire or sell an asset that the contract involves. At the end of a period, it is possible to analyze whether or not you want to buy or sell such an asset.

If the option is made to purchase a share, for example, the investor may or may not acquire the asset in the period that has been agreed.

In binary options it is different, since the investor does not directly acquire or get involved with the option’s asset. In this case, only the price of the underlying asset is monitored and the profit is attributed to those who bet correctly.

Learn more about what Options are and how they work.