Binary Options Contracts

Binary options contracts have two big features; their risks and outcomes are defined. The reason for the name binary is that they have only two possible results at the end. Traders who use them either receive their predefined profit if the trade is successful or lose the money that they paid to open the trade. Being aware of the exact amounts of potential profit or loss helps you decide whether you want to trade or not. You have control over the results that may happen.

What is a binary options contract?

It is just like a three-way junction road, and you should decide to go to the right or left road. You only have two ways in front of yourself. Using binary options makes each trade into such a junction road. For example, you think the price will probably be above a specific level at a certain time, and then you decide to go (for example) right and buy the desired asset.

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And if you think this won’t happen, you go left and sell. It’s not something complicated. However, in a real situation, when placing an order for a binary option contract, you actually don’t buy or sell anything, and you only speculate on the market.

You can speculate on Forex, stock indices, events, and commodities with binary options contracts. Therefore, the first thing you should do is choosing a market. Then you must decide if the price of an underlying market is going below or above a specific level. And finally, you should determine the expiration time. It may last from a few minutes to a few days.

Pros and Cons of binary options contracts

Binary options are getting so popular these days, and some people use them to make money as their main job. However, like any other trading strategy, binary options have their own pros and cons. Here you can see some of the most important ones:

• High profit: one of the most important reasons binary options are becoming popular is their great profit. Traders can earn at least a 70% profit if they act correctly. Such a profit is not something usual in other trading strategies.
• Simplicity: Many traders like binary options a lot because they are just as simple as a yes or no question. You just have to decide whether the price of an asset will go higher or lower at a certain level. Also, you know exactly how much money you can possibly earn or lose before doing anything.
• Thrilling nature: binary options are usually short-term trades, and traders can quickly see the outcome of their decisions. That makes them exciting for traders, and they can see the results soon.
• Regulation: since binary options are new, many regulatory agencies haven’t specified certain rules about them. That is why many binary options brokers are not regulated, and this may lead to some problems for traders, and trusting such brokers is not easy.
• Significant losses: when traders’ decisions are wrong, they lose all of the money that they put into a binary options trade. It is very risky to use high amounts of money for these trades. Financial experts usually recommend making small trades at least for the first few times.

An example of a binary options trade

Imagine a binary options broker offers 80% for the binary options call on GBP/USD, which is trading at $1.40 at the moment. You have been looking at the price movements for a couple of hours, and you think the price will rise in the next 10 minutes. Therefore, you decide to invest $100. If the price of GBP/USD goes higher than $1.40 after 10 minutes, you can earn a profit of 80% of your initial investment.

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It means that you earn $80. However, if the price drops below $1.40, you will lose the whole amount of investment. Yes, you lose $100. It does not matter how much higher or lower the price goes compared to the initial price at the expiration time; your profit and loss are always a fixed amount.

Conclusion

Binary options contracts are quick, and they provide you with many trading opportunities. They are not complicated, and both novice and professional traders can use them to make a good profit. However, you should have a plan to reduce the risks and protect your money. They may seem to be very simple with many advantages, but you should have a great deal of information about trading before using them. They are only profitable when your assessments about the market are correct.

Source: Wikipedia

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