What Is Binary Options Trading?

In the financial world, binary options or trading online, as some people prefer to call it, is a safe and inexpensive way of playing the stock market without losing all your investment in one shot. It is a relatively new way of trading in the market and became legal and regulated in the U.S. in 2008. You simply have two choices when you trade binary options. You are predicting whether the price of the asset you have purchased in your option contract  or trading session will go up or down when your contract reach its expiry time.

It is much simpler than Forex trading. With this type of option the purchaser can receive a payoff by predicting correctly the two possible outcomes of the price of an asset through a broker or trading platform. The two possible outcomes are whether the price of the asset will go up or down in a specified amount of time. The trader will either place "call" options on the price of the asset if he predicting it will go up or place "put" options on the price if he is predicting it will go down from the starting or strike price. If his prediction is correct he would earn his invested amount plus a percentage of the profit and if his prediction is wrong he loses the amount he invested.

 There are two types of binary trade options. The first one is the "cash-or-nothing" binary option and the second type is the "asset-or-nothing" binary option. The cash-or-nothing binary option is the one I will be discussing here, pays some fixed amount of cash if the option expires in-the-money, which means your prediction was correct.In comparison, the asset-or-nothing pays the value of the underlying security.

 Here is an example of how a "cash-or-nothing" binary option is played out. A purchaser makes a purchase of a binary cash-or-nothing call option on the price of ABC Corp's stock to be greater than $100 after 4:00 P.M on Friday with a binary payoff of $1,000. Then, if at the future maturity date, often referred to as an expiry date, the stock is trading at above $100, $1,000 is received. If the stock is trading below $100, no money is received. And if the stock is trading at $100, in other words "on the money", the money is refunded to the purchaser.

 Though binary options have been around for several years, some brokers are regulated while there are many that are not. That means many of the trading activities on the internet are prone to fraud. The U.S. Securities and Exchange Commission (SEC) and Commodity Futures Trading Commission (CFTC) have issued a joint warning to American investors regarding unregulated binary options. The main concern with unregulated brokers is that the investor money may not be placed in a trust account as required with regulated brokers and transactions are not monitored by a third party to ensure fair play.

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