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Binary options have become a popular financial instrument among UK traders in the last decade. Recently, they've become available to US traders as well. Binaries are easy to learn, easy to trade and offer impressive returns.
Just like forex trading, binary options are accessible to the average trader and don't require a large bankroll. This website will teach you all you need to know about trading forex binary options, including trading strategies, technical analysis and brokers.
Binary options are available for asset classes such as currencies, stocks, indices, and commodities. We will focus on binary options for forex, due to the widespread availability of chart data and technical analysis tools for the forex market. This site is focused towards products that are available to US traders, and as such we will not address brokers that do not accept US customers.
What Are Binary Options?
A binary option is a simplified derivative. A derivative is a security whose value is derived from another financial instrument. Types of derivatives include options, swaps and futures. Derivatives are typically complex instruments that are only available to sophisticated investors and financial institutions. However, binary options are very simple to understand, and available to everyone.
A binary option is a derivative with a fixed payout. When the expiration price of the underlying security closes above or below the strike price at the expiration time, the binary option is exercised, and the trader's profit or loss is realized. For example, let's examine the binary option EUR/USD > 1.4500 at 3PM. EUR/USD is the underlying security, 1.4500 is the strike price, and 3PM is the expiration time.
If the trader places a Call (buy) on this option, they are wagering that the expiration price of EUR/USD at 3PM will be above 1.4500.
If the trader places a Put (sell) on this option, then they are wagering that the close price of EUR/USD at 3PM will be below 1.4500. If the trader is correct and the option expires in-the-money, they will receive a fixed payout.
Types of Binary Options
Nadex and IG Markets binary options are priced between 0 and 100 – the price representing the probability that the option will expire in or out of the money. When a binary option expires above the strike price, the settlement value is 100. If the option expires below the strike price, the settlement value is 0. The payout received will depend on the price the option was initially purchased at. These binary options can be exercised anytime before expiration.
The second type of binary option are fixed-payout binary options. These are the simplest options available, and a good choice for new traders. If the option expires in the money, the trader will receive a fixed payout, typically between 65-75% of the initial investment. Most brokers who offer this type of binary option will credit up to 15% of the initial investment on a loss. Fixed-payout binary options cannot be exercised before expiration.
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